Owner’s Draw is an equity account on the Balance Sheet. It represents the sum of personal money that the owner has added and removed from the business. I recommend that sole proprietors do the following.
1. Change the name of Retained Earnings to Owner’s Draw. If there is already an Owner’s Draw, Owner’s Investment, or other types of Sole Proprietor equity accounts, merge them with the new Owner’s Draw account just created (from Retained Earnings). I was taught that sole proprietors do not have Retained Earnings. I was also taught to have only a single Owner’s Draw account for both additions and subtractions from equity for sole proprietors.
I believe in simple and streamlined charts of accounts. Keep it clean and lean and only have a single Owner’s Equity account, one that was formerly Retained Earnings.
2. Turn off the Preference that warns when the Retained Earnings account (now Owner’s Draw) is being used. This way, QuickBooks won’t interrupt with annoying messages every time that account is used.
3. Use the Owner’s Draw (formerly Retained Earnings) account at these times:
- Any time money is removed from the business for personal reasons
- Any time personal money is added to the business
Removing money from the business for personal reasons can take the form of a paper check, an ATM withdrawal, a credit card charge, or any other reason business funds were used for personal purposes.
The Owner’s Draw account will show as a negative (debit balance). This is normal and perfectly acceptable. In fact, a positive Owner’s Draw account, when set up and used as I show here, is a potential red flag.