When a member of an LLC withdraws money, it is recorded in a drawing account.
Multi-member limited liability companies (LLCs) are business structures that have two or more members. Each member in an LLC has a capital account, which is an equity account, that tracks the investments and profits individually for each member. Along with having a capital account, each member has a contra-equity account called an owner's drawing account that is used to track withdrawals each member makes.
Instructions
1. Review the owner's capital account. Each member of an LLC has two individual accounts. The capital account tracks the amount of money the individual owner has rights to. This account has a credit balance. The other account each owner has is a drawing account. This is a temporary account that is closed at the end of each year and contains a debit balance. It is used to track the withdrawals of the individual owner.
2. Ensure that the withdrawal is available. When there are multi-members of an LLC, it is often necessary to discuss taking a withdrawal with the other members. If the member who wants a withdrawal has enough capital to cover the withdrawal, it generally is approved by the other members. The details of how owner's draws work should be stipulated in the LLC's operating agreement.
3. Determine the amount. The owner requesting a draw must state the amount of money he would like to withdrawal. The company must then issue a check to the member for the amount of the withdrawal.
4. Journalize the transaction. Whenever a transaction occurs in a business, the accounting worker performs a journal entry in the company's general journal. The journal entry for the draw is accomplished by debiting the owner's drawing account and crediting cash for the amount of the withdrawal. After the entry is journalized, it must be posted into the company's general ledger; which is a book that tracks all account balances of the company.
5. Close the account. At the end of each year, each owner's drawing account is closed. This process occurs to update the owners' capital accounts. To close the drawing account, the capital account is debited for the amount in the drawing account and the drawing account is credited for the full amount in the account.
Tags: drawing account, capital account, owner drawing, owner drawing account, account that