Everything you want to know about Owner’s Draw in QuickBooks

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.

 

 

2 thoughts on “Everything you want to know about Owner’s Draw in QuickBooks

  1. This is great advice Jennifer. I often suggest that owners also consider setting up an “Other Expense” for Owner Draws. This way it is below their regular profit and they can see the profit impact of their “wage”. What are your thoughts on that? My big thing is that they be consistent – either to the equity account or to the expense account. There is nothing worse than trying to figure out what they are trying to do when they post it all over the place.

    Do you find any value in having a separate equity account called draws so they can see what they have taken cumulative?

    Thanks Jennifer.

    1. Thanks, John! I agree with you that consistency is key. Inconsistent entries are a headache to diagnose and fix. Your idea to keep it as “Other expense” on the Income Statement is a good one. This way, it rolls into Retained Earnings (hopefully renamed to Owner’s Draw) anyway. My preference is for sole proprietors to have one equity account, named Owner’s Draws. These clients often end up doing a lot of their own bookkeeping, and keeping the Chart of Accounts uncluttered is important. So that is the value I see–too many accounts in the Chart of Accounts is what can lead to inconsistent bookkeeping practices. Let me know what you think.

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