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A drawing account, also called a capital account, is a special kind of bank account used in small businesses. This type of account is basically a kind of record-keeping account to track withdrawals. The balance on this type of account is often put into a separate account at the end of a year to give the drawing account a zero balance.
The purpose of this type of account is to show how much cash has been used by individuals involved in a business. One kind of business that uses drawing accounts is a partnership. Partnerships are popular business setups for small service businesses and other kinds of businesses that are limited in size. In partnerships, each partner might have their own capital or drawing account to draw money from. Partners who invest more will get a credit to their capital account.
Drawing or capital accounts can even be important to businesses as small as a sole proprietorship. In a sole proprietorship, there may be only one person principally involved in withdrawing money from the business account. The drawing accounts still helps to show how much money has been withdrawn at the end of a year or other time period for accounting purposes. This will help the proprietor or owner deal with accounting tasks such as tax accounting.
The drawing or capital account basically helps the owners of a business to be able to take money out of the business with appropriate recording for later accounting. The capital account for a small business is similar to the dividend account of a corporation, where the money that remains will be dispersed in some form at the end of a year’s time. Unlike many kinds of investment accounts, a drawing account is primarily for keeping track of money that gets debited from the capital pool of a business over a time period.
It’s important for proprietors, partners or other business owners to realize that amounts taken from this type of account represent “disinvestment” in the company and reduce owner equity. One reason that accurate drawing or capital accounts are so important is that there can be a lack of trust between partners. In some cases, a cash-strapped owner may be tempted to take too much money out of the business. The account ensures that there will remain enough money in the business to help it continue to operate, and that owners who withdraw excessive amounts of funds from these accounts will be held responsible. The kinds of financial oversight that drawing accounts and similar tools provide are vital to the ongoing solvency of any kind of business.