Definition
A Partner’s Drawing refers to any funds withdrawn from the business by a partner for personal use. It represents a reduction in the partner’s capital account within the partnership. Drawing accounts are temporary accounts that reset each accounting period, transferring their final amount to the partner’s capital account at the end of the fiscal year.
Examples
- Weekly Withdrawals: A partner withdraws $500 each week for personal expenses. Over 52 weeks, this totals $26,000.
- Lump Sum Withdrawal: A partner takes a lump sum of $20,000 to pay for personal travel expenses.
- Monthly Withdrawals: A partner withdraws $2,000 at the beginning of each month to pay for household needs, totaling $24,000 annually.
Frequently Asked Questions (FAQs)
What are drawings in a partnership?
Drawings in a partnership refer to the amount of money or goods taken by the partners from the firm’s profits for personal use.
How do drawings affect a partnership’s accounts?
Drawings reduce the partner’s capital account and are not considered expenses of the business. They are not included in the profit and loss statement but affect the balance sheet.
Are drawings taxable?
Drawings themselves are not taxable. The partners are taxed on their share of the partnership’s profit, irrespective of the amounts withdrawn.
How are drawings recorded in accounting books?
Drawings are recorded by debiting the drawing account and crediting the cash account or bank account, thereby reducing the partner’s equity in the partnership.
What’s the difference between drawings and salary in a partnership?
Drawings are personal withdrawals from profits that reduce the capital account, while salary is considered an expense and is usually agreed upon as a payment to partners for managing and running the business.
- Capital Account: The account reflecting the amount of capital contributed by partners in a business.
- Profit Sharing: The distribution of a portion of the firm’s profits to partners based on an agreed formula.
- Partnership Agreement: A legal document outlining the terms and conditions of the partnership, including profit-sharing ratios and the handling of drawings.
- Equity: The value of an owner’s interest in a firm, calculated as total assets minus total liabilities.
- Distributable Profit: The portion of the profits available for distribution to the partners after all expenses and taxes have been deducted.
Online References
Suggested Books for Further Studies
- Partnership Accounts Made Easy by R.C. Gupta
- Advanced Accounting by Joe Ben Hoyle, Thomas Schaefer, and Timothy Doupnik
- Fundamentals of Partnership Accounting by Janet Henshaw
Fundamentals of Partner’s Drawing: Accounting Basics Quiz
### Who mainly uses a partnership's drawing account?
- [x] Partners in the partnership
- [ ] Employees of the partnership
- [ ] Investors of the partnership
- [ ] Customers of the partnership
> **Explanation:** The drawing account is specifically used by partners within the partnership to withdraw funds for personal use.
### How is a partner's drawing typically recorded in accounting books?
- [x] Debit to drawing account, credit to cash account
- [ ] Debit to cash account, credit to drawing account
- [ ] Debit to capital account, credit to drawings
- [ ] Debit to drawings, credit to profit and loss account
> **Explanation:** Drawing transactions commonly involve debiting the drawing account and crediting the cash or bank account.
### What happens to the drawing account at the end of the fiscal year?
- [x] The drawing account balance is transferred to the partner's capital account.
- [ ] The drawing account balance is written off as an expense.
- [ ] The drawing account balance is ignored.
- [ ] The drawing account balance is carried over to the next year.
> **Explanation:** At the end of the fiscal year, the drawing account balance is transferred to the partner’s capital account, resetting the drawing account balance to zero.
### Do drawings affect the partnership’s net income?
- [ ] Yes, they reduce net income.
- [x] No, they do not affect net income.
- [ ] Yes, they increase net income.
- [ ] They only affect taxable income.
> **Explanation:** Drawings affect the capital account and not the net income of the partnership.
### Are drawings considered taxable income to the partner?
- [ ] Yes, always.
- [ ] No, never.
- [x] Drawings are not taxable; only the partner's share of profit is taxed.
- [ ] Only if they exceed a certain limit.
> **Explanation:** The partner’s share of profit is subject to tax, regardless of the amounts withdrawn as drawings.
### Can a partner withdraw more than their share’s profit in drawings?
- [x] Yes, but it may affect their capital account negatively.
- [ ] No, drawings are strictly limited to the share of profit.
- [ ] Yes, it does not affect any accounts.
- [ ] No, it leads to legal issues.
> **Explanation:** While a partner can withdraw amounts beyond their profits, this will reduce their capital account balance and may lead to a deficit.
### What consequence does excessive drawing have on a partner's capital?
- [x] It decreases the partner's capital account.
- [ ] It increases the partner's capital account.
- [ ] It has no consequence on the partner's capital.
- [ ] It causes tax liabilities.
> **Explanation:** Excessive drawings decrease the partner’s capital account balance, reflecting a reduction in their ownership interest in the partnership.
### Which financial statement showcases the total drawings within a period?
- [ ] Income statement
- [ ] Balance sheet
- [x] Partner’s capital statement
- [ ] Cash flow statement
> **Explanation:** The partner’s capital statement details changes in the capital account, including total drawings.
### What is the primary purpose of a partner’s drawing account?
- [ ] To record business expenses.
- [x] To keep track of amounts withdrawn for personal use.
- [ ] To record sales revenue.
- [ ] To calculate net income.
> **Explanation:** A drawing account is exclusively maintained to track amounts withdrawn by the partners for personal use.
### In which financial records are drawings never included?
- [ ] Partner’s capital statement
- [x] Profit and loss statement
- [ ] Balance sheet
- [ ] Cash book
> **Explanation:** Drawings are not considered expenses and thus are excluded from the profit and loss statement; they are shown in the capital account on the balance sheet.
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