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Lesson 5 of 13The Accounting Cycle: Service Business
Unit 2 · Lesson 5 of 13

Drawings and the Statement of Owner's Equity

Owner's equity doesn't just sit still — it grows with new investments and net income, and shrinks with drawings and net losses, and the statement of owner's equity shows exactly how.

2 min read7 practice questionsAsk AI about this →

Key things to remember

  1. 1The drawings account records assets withdrawn from the business by the owner for personal use.
  2. 2Drawings is NOT a business expense — it never appears on the income statement.
  3. 3The statement of owner's equity shows how Capital moved: beginning balance + investments + net income (− net loss) − drawings = ending Capital.
  4. 4Net income increases Capital; net loss and drawings both decrease Capital.
  5. 5The ending Capital figure on the statement of owner's equity must match the Capital shown on the balance sheet.

Owner's equity at the end of a period is rarely the same number it was at the start. Owners sometimes add more of their own money to the business; the business earns (or loses) money through its operations; and owners sometimes take money or goods out of the business for personal use. The statement of owner's equity is the financial statement that shows exactly how all three of those movements changed Capital over the period.

The Drawings Account

The drawings account records the withdrawal of assets from the business by the owner. It is crucial to understand that drawings are not a business expense — the owner isn't buying anything the business needs, they're simply taking business assets for personal reasons. Because it reduces owner's equity without being an expense of running the business, Drawings gets its own account, separate from both Capital and the expense accounts, and it never appears on the income statement.

Drawings vs. expenses
If the owner pays a business bill (like rent) with business cash, that's an expense. If the owner takes business cash to pay a personal bill (like their own mortgage), that's drawings. Same account (Cash) decreases either way — the difference is who benefits.

How Net Income Flows Into Capital

Capital doesn't get directly increased or decreased by every individual revenue and expense transaction throughout the year — those accumulate in their own temporary accounts first. At the end of the period, the net result (net income or net loss) flows into Capital as a single combined figure, alongside any new investments and any drawings.

Maple Grove LandscapingBalance SheetDecember 31, 2025AssetsCash4 000Accounts Receivable2 500Equipment9 500Total Assets16 000LiabilitiesAccounts Payable3 000Bank Loan Payable2 000Total Liabilities5 000Owner's EquityJ. Chin, Capital11 000Total Liab. + O.E.16 00016 000 = 16 000 ✓ balanced
Fig 1The statement of owner's equity bridges the income statement's result into the balance sheet's Capital figure.
Trillium Bike Repair — Statement of Owner's Equity — For the Year Ended December 31, 2026
J. Reyes, Capital, January 1, 2026 (initial investment)$17,000
Less: Net Loss for the year($2,500)
Less: Drawings($400)
J. Reyes, Capital, December 31, 2026$14,100
Both the net loss and the drawings reduced Capital over the year.

Worked examples

Reveal one step at a time and try to beat it to the next line.

Example 1
A business starts the year with $22,000 of Capital, the owner invests an additional $5,000 during the year, the business earns net income of $8,400, and the owner withdraws $6,000 for personal use. Find ending Capital.
Example 2
Using Trillium Bike Repair's figures — initial investment $17,000, net loss $2,500, drawings $400 — prepare the statement of owner's equity and find ending Capital.

Where marks get lost

  • Recording an owner's personal withdrawal as an expense instead of using the Drawings account — this would incorrectly lower net income on the income statement.
  • Forgetting that Drawings has a normal debit balance and closes to Capital with a debit to Capital, not a credit.
  • Adding net income directly onto the trial balance's Capital figure without checking it against the statement of owner's equity first.
  • Assuming a net loss and drawings do the same thing to the business — a net loss means the business itself lost money; drawings means the owner chose to remove assets regardless of performance.

Flashcards 5

Drawings account
Is Drawings an expense?
Statement of owner's equity formula
What reduces owner's equity?
+ 1 more

Practice

1
Beginning Capital $15,000, net income $3,200, drawings $1,800. Find ending Capital.
$
2
Beginning Capital $9,000, net loss $1,100, drawings $500. Find ending Capital.
$
3
Which statement about the Drawings account is TRUE?
4
What is the difference between an expense and drawings, even though both can reduce Cash?
5
On the statement of owner's equity, a net loss is...
6
Trillium's beginning Capital is $17,000. After a $2,500 net loss and $400 of drawings, what is ending Capital?
$
7
Why must the ending Capital on the statement of owner's equity match the Capital shown on the balance sheet?

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