Drawings in Business: A Humorous Take on a Serious Account
When the business cookie jar gets a little too tempting, the term “drawings” comes into play. In the world of business finance, particularly for the non-incorporated entities, when an owner decides to take cash or assets out of the business for personal use, it’s not called “shopping”; it’s termed as drawings. Think of it as helping yourself to the marshmallows in the business hot chocolate!
What Exactly Are Drawings?
Drawings are amounts withdrawn by the owner from the owner’s business for personal use. They are commonly seen in unincorporated businesses, such as sole proprietorships and partnerships, where the financial affairs of the business and the personal financial affairs of the owner can still happily mingle without too many legal formalities.
Drawings vs. Dividends: A Tale of Two Distributions
If a business steps up its game and becomes incorporated, the owner’s withdrawals transform into dividends or scrip dividends - a slightly more sophisticated sibling of drawings. While a dividend sounds like the prize you get at the end of an investment game show, it’s actually a bit more complex. It’s a share of the profits distributed by an incorporated company to its shareholders, calculated per share and distributed periodically. Imagine your business saying, “Thanks for sticking around, here’s your slice of the pie!”
How Drawings Affect Accounting
In the accounting world, the Drawings Account is the personal piggy bank of the business owner within the company’s books. At the end of an accounting period, the Drawings Account is balanced and then deducted from the owner’s capital in the business. This account keeps track of all the marshmallows taken by the owner so that the hot chocolate, or the business’ equity, doesn’t get too diluted.
Related Terms:
- Dividends: These are payments made by a corporation to its shareholder members based on the type of shares they hold. It’s like getting a ticket to the profit party.
- Scrip Dividends: Instead of cash, companies sometimes offer additional shares as part of the dividend. It’s like your business saying, “I owe you some cash, but how about more of me instead?”
- Partnership: A legal form of business operation where two or more persons manage and operate the business, sharing both profits and liabilities. Imagine a business marriage, but with legal documents instead of romantic vows.
Chuckle-Worthy Reading:
- “Accounting Made Simple” by Mike Piper – Clear, concise, and less likely to make you want a nap than other accounting books.
- “Straight from the Gut” by Jack Welch – Not directly related to drawings, but a good spice on management and financial dealings from the former CEO of GE.
Drawings might just seem like business pocket money, but handle them with care: too many marshmallows today, not enough hot chocolate tomorrow! Keep your accounts balanced, and your business storytelling humorous with these insights. And remember, in the world of finance, a little laughter goes a long way.
