Knowing how to properly manage your business’ financials allows your business to properly grow. Every dollar is important, but often, dollars are left on the table because of accounting or bookkeeping mistakes. One of the most confusing areas of small business accounting is owner’s draw. To provide weekly accounting tips for entrepreneurs, Kahuna Accounting started the “Accounting Clarity for Entrepreneurs” series. Each week, we’ll feature a new how-to video and description based on the questions we get from the many entrepreneurs we work with. Here is “Owner’s Draw for Small Businesses in the Xero Cloud” tutorial.
See below for the transcription of the audio for the Accounting Clarity for Entrepreneurs (ACE) Series #5
Hello, welcome to another edition of Accounting Clarity for Entrepreneurs. Today we’re going to find out how to find your owner’s draw and what that means. This has been prepared by one of our senior accountants here at Kahuna Accounting – Ryan Oltman. Let’s get right into it.
First, let’s start here; what is owner’s draw? Owner’s Draw is cash taken directly from the business for personal use by the owner. As a business owner, it’s important to have a handle on this because this number directly effects the bottom line of the business. It directly effects the amount of capital that you have in the business, so you want to have a good handle on it.
So now that we know what it is, how do we find it?
First, you’re going to find your balance sheet. The balance sheet is where this is located. If you’re in Xero (cloud accounting software), you can just head to reports. On the dropdown (menu), you will see the balance sheet. Open the balance sheet to find your owner’s draw.
Now we can see our balance sheet, and once we do that, you want to look at the bottom under “equity,” and you will find your owner’s draw. The reason why owner’s draw is located in the equity section is because the business owner is taking cash out of the business, and that is a direct reduction in the owner’s capital in the company.
Another important thing to realize is that because when you’re looking at a balance sheet you’re looking at something accumulative. You’re looking at, like we said in another edition of ACE, a snapshot of everything that’s going on in the company. If you want to know what happened with your owner’s draw in a specific period of time, you’re going to want to drill in one step further. In Xero, you can click on owner’s draw to learn a little bit more about what is going on.
Once you do that (click on “owner’s draw”), it will take you to the screen that explains what’s going on in the owner’s draw account. When you see it here, one thing to notice is that at the top there is an opening balance of $1,500.00. What we did in this report is isolated from January 1st to January 31st of 2016. The opening balance is everything prior to that. Once you get past the opening balance, you’re going to see all of the activity since then. We are able to see that the actual amount taken out for owner’s draw in January of 2016 is 4,530.50.
Note: In this example, our total draw is $6030.50 in Jan 2016. However $1,500.00 was from previous months, the actual amount taken out in Jan 2016 is $4,530.50 which is the total in the column. Opening balance (1,500.00) plus activity over the time period (column total) equals the closing balance.
Why does this matter?
This directly effects your bottom line, so you absolutely want to know why. You want to be certain that the money is going to where it needs to go.
The other important thing to realize is that sometimes items that are questionably related to the business, like expenses at Walgreens; a lot of times your bookkeeper or accountant will make that an owner’s draw because it seems personal. There’s a chance that it is actually a business expense. You want to know if you have owner’s draw coming out and what it’s for. Owner’s draw isn’t just money taken out from your account, but expenses that you have that are personal expenses – those go to owner’s draw. You always want to take a look and make sure that your owner’s draw is truly owner’s draw because it really effects the business.
That’s owner’s draw, and that’s a big piece of running your business – having a handle on things like that. If you’re interested in getting in a system like Xero, please head to KahunaAccounting.com and we can see if it makes sense to work together.