[jcarberry]

I run my business as an independent, not as a corporation. I do not receive a salary.

My question: What transaction should I post in order that my Profit/Loss does not continue to grow in the accounts? If, for example, my profit for 2005 is 100,000, of which I spend most of it on personal expenses that I do not book in my accounts, what am I supposed to do to get that amount off the books?

Thanks,
Josiah

[CaptainForest]

Debit Owner's Equity 100,000
Credit Owner's Drawing 100,000

That journal entry says that you have removed 100,000 of equity from your accounts for personal use.

I would also like to add that perhaps you should look into incorporating to protect yourself. With a corporation, your liable only to the extent of your corporations assets, not your own personal ones. As a sole-proprietor, you are 100% personally liable. Whether to incorporate or not is a personal choice, and different depending on your unique circumstances.

[jcarberry]

>>Debit Owner’s Equity 100,000
>>Credit Owner’s Drawing 100,000

I am not sure I understand what difference this transaction makes. The balance of acct "Owner's Drawing" will simply become very large over time, instead of "Owner's Equity". Where on the chart of accts would "Owner's Drawing" be?

Thanks,
J.

[CaptainForest]

When you add equity to your business, you Cr. Owner's Equity.

When you take out of your business, you Dr. Owner's Drawings and Cr. Cash.

Then to close the Drawings account, you Cr. Owner's Drawings at the end of the year, and Dr. Owner's Equity.


Remember:
Your balance sheet consists of 3 parts.

Assets = Liabilities + Owner's Equity



Another way to think of it is like this:
As you said, you had 100,000 in net income. You used that all on personal use.
So, throughout the year, you had journal entries of

Dr. Owner's Drawing 30,000
Cr. Cash 30,000

Dr. Owner's Drawing 40,000
Cr. Cash 40,000

Dr. Owner's Drawing 20,000
Cr. Cash 20,000

Dr. Owner's Drawing 10,000
Cr. Cash 10,000

Now, at the end of the year, your Owner's Drawing account has a balance of 100,000.

So to close that, you Dr. Owner's Equity, and Cr. Owner's Drawing.

That closes your Owner's Drawing account and takes away 100,000 of Equity from your business.

[jcarberry]

Thanks, that's clearer.

But is the owner's drawing account considered as an expense account or a liability account?

[CaptainForest]

More like an expense account. Since when you take money out, you charge that account.

It is a contra account. Works against your owner's equity account. So you charge it when you take equity out of your business.