Drawings Explained: We take them, what are they?

Drawings, the way you’ve been paying yourself since ages ago.

But what are they really, how do you pay tax on them, and what is the end result of taking them?

Drawings are the funds you take out of the company bank account, personally.

So, for instance, there is money in the business bank account, and you haven’t been paid. So you transfer these funds to your personal bank account, that is a ‘drawing.’

Or, instead of transferring the funds to your personal bank account, you just make the personal payment from the company bank account. That is also a ‘drawing.’

A drawing is simply a payment made from the company bank account for personal purposes.

In a small business context, a drawing is usually how it’s shareholders get paid, rather than being on fixed PAYE salaries.

As month-to-month profits are variable, it can be easier for the small business owner to just take ‘what’s left over’ as their salary, a ‘drawing.’

That’s not to say you can’t be on a PAYE salary if you own your own small business. You can be, and it is often worth the extra admin. You pay your tax as you go, so it’s unlikely you’ll have an end of year tax bill.

Back to drawings.

If you take too much, you put some back. For instance, if you take your drawings, but forget about an upcoming business expense, and the company bank account is empty, you can put funds back into the account to cover the expense. This is the reverse of drawings.

This is what’s known as ‘capital introduced’ or ‘funds introduced.’ It’s the opposite of drawings.

So, drawings can be taken, but they can also be given back to the company.

Think of the two working together – drawings and capital introduced – as a revolving loan account. You take money from your business, but sometimes you need to give it back.

This revolving loan account actually has a technical name. It’s called the ‘shareholders current account’.

You might have seen this account on your company’s balance sheet. It’s simply the sum of your drawings and capital introduced combined.

For instance. If I took $10,000 out of the company bank account last month as a drawing, and this month I put back $2,500, then the balance of the current account is an overdrawn $7,500.

If you take drawings, then how do you pay tax?

At the end of the financial year, your accountant will prepare your company’s  tax return and make an accounting entry that awards you a ‘shareholder salary.’

This salary is usually for the amount of profit the company made during the year. Which, as it turns out, is roughly how much you took in drawings during the year.

You pay tax on this salary. So you basically pay tax on your drawings.

Keep that in mind when you take your next drawing.

You need to set some of that drawing aside for tax.

I’m overdrawn, what does that mean?

It means you’ve taken more from the business than what the business earned in profits.

For instance, if the business has a loan with the bank, and instead of using these funds for business expenses or purchases, you take the money as drawings.

That will lead to an overdrawn current account. You never want to be in that position as it means that you owe the company money.

If, in the unlikely event your company goes into liquidation, the liquidators can claw that amount back from you.

That renders the ‘limited liability’ feature of your company mute.