Categories: Business Management

Tracking Draw in a Personal Business

By far, the most difficult part of small-business accounting is the draw account. If you are a sole proprietor or a partnership, income is what the business earns, not what you take from the business. Self-employment draw (take-home pay) is reportable to no one, so why track it? For this reason, many small, single-owner operations overlook this aspect of accounting.

A draw account balances double-entry journals, in which credit must balance debit. If you simply hand your checkbook to an accountant to prepare your income taxes, you may not need to do this, but, under that simplified system, don’t pay for items with the wrong checkbook and overlook pursuant reimbursement.

Partnerships require a written record of who receives what and a recordkeeping method. And, year-end accounting must reflect these figures in the individual capital accounts (showing who owns how much of the business).

During our short-lived partnership with our former son-in-law and our (still current) daughter, our complex partnership agreement divided the income three ways: Each partner was paid an hourly wage ($6 per hour); half the remaining income (if any) was awarded on a point system (one point per year of active participation), and the remainder was split by invested capital.

This arrangement monetarily rewarded all three aspects of ownership: labor expended, capital invested and longevity in the business operation. The partner who worked the most, received remuneration for his/her efforts, and whoever re-invested income also received increased income in return.

A good accountant will tell a single owner (or a married couple who files jointly) to keep separate checking and credit-card accounts. Write checks from the business to yourself (this is your take-home pay). Pay business bills on the business accounts, and personal bills on the personal accounts.

Even though this is sound advice, I don’t follow it. We handle our draw account internally. Items bought personally for business use (such as “Smurf” cups or tissues bought on the grocery run) become an investment and appear as a negative on the draw account. We purchase personal items on business accounts or business items when doing personal shopping if it’s more convenient. We don’t spend extra time (for us or the sales clerk) running two different receipts at the grocery store. We simply notate the receipt and enter the draw (or investment).

When we take materials from inventory for children’s school pro-jects, I record this as draw. When I ask an employee to run a personal errand (which allows me to keep working), I record this as draw, even though it increases my work time. When we incur extra charges for texting our daughter, I record this as draw. When an employee invests extra time deciphering a particularly unusual entry (or lack of balance) in personal books (such as fighting the city over the house water bill), I record this as draw.

It’s possible, and maybe more practical, to record only those items that affect business or are tax deductible. But numerous small purchases can slip through the cracks if they’re not recorded as business at the time of purchase. Even such small items as M&Ms for coffee breaks, paper towels, tissues and bandages should be included in business overhead. All too often, we’ve bought something intended for one use, only to decide to use it elsewhere. Whether it’s a bookcase, a television, a computer or something smaller, just a few searches through old records convinced me to keep total records.

Recording household expenses

(i.e., total recordkeeping) helps minimize the paperwork involved in shared support (such as divorced parents, geriatric care, or simply the ins and outs of almost empty-nesting). The same is true of a home-based business and the personal household. And it’s easy to account for an item that you suddenly find is tax deductible.

When our grown daughter was on her own (and we didn’t provide 51% of her support), we could still deduct her medical bills (which we paid). No fuss, no muss, no searching for that scrap of paper you are sure should be…somewhere.

Kent and I have been married 39 years. We live together and have a joint household budget. We equally share income and draw. Rather than decide who receives each draw, or double the entry time by recording half under each name, we simply keep one draw account. Checks written to us, from my company, are usually made out to Kent (I’m a bit old fashioned). We know we share equally.

We recently decided all possible purchases should be processed through credit cards. Not only does this provide excellent record-keeping (especially with business accounts that include an itemized printout with the statement), but today’s cards give rebates on practically anything!

We have cards that return 5% on purchases at grocery stores, gas stations and drugstores (personal); at office-supply houses (personal) that can be combined with point accumulations (business) for further discounts; at hotels and restaurants (personal); 3% at home-improvement and hardware stores; and, perhaps best of all, 5% off utilities, communication and courier services (business).

To take advantage of applicable discounts, we use the most practical and economical method to buy what we need, then cost it internally. This makes our draw account very fluid. We also now have three checking accounts: our business and personal accounts, and a third (also business) reserved (for security reasons) to make online payments. The personal account rarely has much money in it, so we pay most bills (business or personal) from the two business accounts. This further emulsifies our accounting with fluid transfers between the three accounts. Our names rarely appear on checks anymore.

In looking at this year’s draw report, I can see payments (from business accounts, taken through draw to personal expense) for our mortgage, utilities and communication bills; our personal insurance (car and health); our car payment; doctor bills and personal credit cards. Cash from customers also goes through this account and into our (personal) pockets.

On the other side, airline tickets for such business-related shows as the International Sign Assn.’s Sign Expo, appear as investment (use a personal credit card). From the personal-savings account, we paid the business line note (which also appears as investment). Gasoline for business vehicles was charged to personal cards. Investments include the transfers for business miles driven in personal vehicles. Most months’ ledgers include 45 to 50 separate entries.

An interesting bubble has occur–red in the system this month. To prove we both work for Smith Sign Studio, our health-insurance com–pany has requested copies of our draws, expecting to see checks addressed to each of us. So, draw may be reportable to someone.

Items Typically Invested from Personal Funds

• Supplies: janitorial and first aid (at the grocery)

• Coffee supplies and kitchen paperware (at the grocery)

• Stamps and post-office shipments (from a vending machine)

• Gas for the van and crane (credit-card purchase)

• Airline business-travel tickets (credit-card purchase)

• Occasional tools (such as an atlas or flashlight, purchased with other things)

• Cash advances to employees (repaid from paycheck)

Items Typically Recorded as Personal Draw

• Personal-account payments made from business-checking accounts

(for online purchases)

• All utility bills paid by credit card (best account)