Personal Expenses and Drawings

It’s always better to separate personal and business expenses as it simplifies the bookkeeping. However, if the owner of a business has paid personal expenses using funds provided by the business then they need to be recorded as drawings and not as expenses.

If for example an owner pays personal travel expenses of 250 using a supplier account of the business, then the personal expenses would be debited to the drawings account and not to the travel expenses account as follows:

Journal Entry for Personal Expenses

The accounting records will show the following bookkeeping entries for the personal expenses.

Journal Entry for Personal Expenses
Account Debit Credit
Drawings Account 250
Accounts payable 250
Total 250 250

Personal Expenses Bookkeeping Entries Explained

Debit
The personal travel expenses are debited to a temporary drawings account which reduces the owners equity. It is not an expense of the business.
Credit
The owner has used a supplier account to pay for the personal travel expenses. The amount is due to the supplier and creates a liability recorded under accounts payable.

The Accounting Equation

The Accounting Equation, Assets = Liabilities + Owners Equity means that the total assets of the business are always equal to the total liabilities plus equity of the business. This is true at any time and applies to each transaction. For this transaction the Accounting equation is shown in the following table.

Personal Expenses and the Accounting Equation
Assets = Liabilities + Owners Equity
None = Accounts payable + Drawings
0 = 250 + – 250

In this case a liability (accounts payable) increases as the owner has used the suppliers account to pay for personal expenses. The drawings account has been debited reducing the owners equity in the business. The owner has effectively withdrawn part of their equity.

The drawings account is a temporary account and is cleared at the end of each year either by a debit against the capital account, repayment by the owner or against the salary of the owner, depending on the circumstances.

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Personal Expenses and Drawings November 6th, 2016Team

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