When the owner of a business takes money out of the business bank account to pay personal bills or for any other personal expenditures, the money is treated as a draw on the owner's equity in the business. Recording draws in Quickbooks requires setting up owner draw accounts and posting monies taken out of the business bank account for personal reasons to the draw accounts. It is also helpful to maintain current and prior year draw accounts for tax purposes.
Set up draw accounts. Open the chart of accounts and choose "Add." Add a new "Equity" account and title it "Owner's Draws." If there is more than one owner, make separate draw accounts for each owner and name them by owner, e.g. "Smith Draws."
Post checks to draw account. When entering a check written to the owner for personal expenses, post the check to her draw account. A check written to the owner will be debited to her draw account and credited to the appropriate bank account. Notice that both accounts are balance sheet accounts. No expense is recognized by the business.
Post all personal charges to the draw account. If the owner uses a business debit card for personal purchases, post the debit transaction to his draw account. If the owner uses a business credit card, post the charge to his draw account.
Create a "Prior year draws" account at the beginning of the next year. For tax purposes, it often helps to know how much the owner has taken in draws for the current year. One way to do this is to make a general journal entry at the start of each year transferring the balance in the owner's draw account into a separate owner's draw account called "Prior year draws." Rename the owner's draw account "Current year draws" to avoid confusion. If the business has more than one owner, set up prior and current year draw accounts for each owner. At the start of each subsequent year, transfer the balances from "Current year draws" to "Prior year draws." Use only "Current year draws" for posting draws throughout the current year.
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