What is Owner's Equity and Owner's Draw In Bookkeeping?
Updated: Oct 6, 2020
If you own a business as a Sole Proprietor, you will probably have Owner's Equity. Often, to start a new business, the business owner will use their own personal cash to pay for startup costs like buying work computers, machinery, renting an office space or paying a professional to design a logo for their new business. All these items I just mentioned, and so much more, are necessary for a business to start.
There are also times, when a business is not starting up, but still needs new items to help the business or maybe needs a little more cash flow. A business may need a new printer for the office, a large piece of machinery to help improve the business or cash to help pay some bills.
Anytime a business owner, as a sole proprietor, buys something specifically for the business or adds personal money to the business, without categorizing it as a loan, this is called an investment in the business and is what bookkeeping terms Owner's Equity.
Owner's Equity should not be confused with Owner's Draw. Owner's Draw (also known as Draw) is when the business owner takes money out of the business for paying themselves or for purchasing something that is for personal use, not business use. This can be used in lieu of a payroll/paycheck, especially if you do not currently have employees, thus do not have a payroll to contend with. Paying yourself on a regular schedule (i.e. one time a week, every other week, one time a month, etc.) is what I am talking about here. NOT using your business credit or debit card to swipe at a local store and purchase something personal with said business card. (That is a whole different mess that accounting professionals do not want any business owner or employee doing......aka, Big No No!!!)
Now do not get me wrong, I will not smack you if you make a mistake and swipe your business card for personal use, once or twice. Most accounting professional won't. However, continually doing such an offense, may drive me (or your bookkeeper) to cry, and you would not want that, would you?
If you have any further questions about this or other bookkeeping subjects, please contact me at Rebecca@RHBizSolutions.com. I look forward to talking to you about your bookkeeping needs.
Here's To Your Success!
RH Business Solutions