How to book capital con­tri­bu­tions and with­drawals correctly

Business owners often transfer money from their company to their personal account, called an owner’s draw, or inject personal funds into the business, known as a capital con­tri­bu­tion. For sole pro­pri­etors and part­ner­ships, these trans­ac­tions are fine if properly recorded, but failing to do so can lead to issues with the IRS and state tax au­thor­i­ties.

How to do an owner’s draw and record capital con­tri­bu­tions

When recording a capital con­tri­bu­tion or with­draw­al, two things are important:

1. The value of the con­tri­bu­tion or with­draw­al.
2. The accounts from which the money is paid or withdrawn.

This is crucial whether it’s a private with­draw­al or a deposit.

To properly record these trans­ac­tions, you need at least one personal account in your company’s chart of accounts. If multiple in­di­vid­u­als in the company are allowed to make trans­ac­tions between personal and business assets, there should be multiple personal accounts, which are typically sub-accounts under equity. In practice, many busi­ness­es use their own personal account for both with­drawals and con­tri­bu­tions.

For owner with­drawals, you would record the amount from the personal account to Cash or another cor­re­spond­ing account. This is commonly referred to as an owner with­draw­al journal entry. For private deposits, you would record from Cash to the personal account. When closing a personal account, with­drawals appear on the left (debit) side and deposits on the right (credit) side. This process is vital when un­der­stand­ing how to record an owner’s draw in your ac­count­ing system.

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In the company’s balance sheet, owner draws are included under equity. Depending on the balance between with­drawals and deposits, you will either show a debit (more with­drawals) or a credit (more deposits) in equity. These owner draws on balance sheets impact equity, either as a liability or as a relief. Profit and loss also fall under equity.

How to record owner’s draws and capital con­tri­bu­tions with examples

Now, let’s look at examples of booking cash con­tri­bu­tions and with­drawals.

Booking cash con­tri­bu­tions and with­drawals

When you withdraw or deposit cash between your personal assets and your business, you need a personal account as well as a Cash or Bank account.

Example 1:

• Withdraw $50 from the company’s cash register:

  • Debit: Private With­draw­al (1800) $50
  • Credit: Cash (1000) $50

• Deposit $200 into the company’s cash register:

  • Debit: Cash (1000) $200
  • Credit: Private Deposit (1890) $200

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Once the personal account is closed, the balance is reflected in equity.

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Booking non-cash with­drawals

If you take a product for private use, you must register the list price, including any sales tax, instead of the ac­qui­si­tion or pro­duc­tion cost. For example, if you take a chair with a net price of $119:

• Debit: Private With­draw­al (1800) $105
  • $100 for the goods
  • $5 for sales tax (at 5%)

This is also recorded similarly to cash with­drawals in the personal account and equity.

Booking usage with­drawals

If you don’t fully remove an item but use it privately (e.g., a company car), you need to calculate the private use value, typically based on a per­cent­age of usage. For instance, if you use the company car for personal purposes, the U.S. IRS allows a flat 1% valuation of the car’s net list price per month for tax purposes.

Example:

• The car’s list price is $50,000. 1% of this is $500.
• 20% discount for business use = $100.
• Sales tax is cal­cu­lat­ed on $400 (after the discount).
  • Sales tax at 5% = $20.
• The private with­draw­al for the month is $520.

This would be recorded as:

• Debit: Free Levies $520
  • $400 for personal use
  • $20 for sales tax
  • $100 for the flat rate business discount

Booking private con­tri­bu­tions

Let’s now look at a private con­tri­bu­tion example. Suppose you want to con­tribute a personal asset (like a PC) to your business. The book value would be the de­pre­ci­at­ed value of the item. If the PC orig­i­nal­ly cost $1,200 and is now worth $800 after de­pre­ci­a­tion, you would record it as follows:

• Debit: Other Operating Assets $800
• Credit: Private Deposits $800

Please note the legal dis­claimer for this article.