Just wanted to clarify what the correct way to account for sole trader drawings? I’ve always gone for “Salary and Drawings” and selected “Proprietor Drawings”. However, I notice today that there’s a nominal code (3100) for “Proprietor or Partner Drawings” with nothing in it.
Am I doing it correct, and if so, what’s this nominal account for?
As a Sole Trader business there is no legal separation between you and your business, therefore your sales less your business expenses becomes your trading profit and your trading profit is counted as your personal income.
The ‘Proprietor Drawings Account’ (1202) is a Balance Sheet account used to track both drawings and capital introduced, is does not have an effect sales/income and therefore trading profits. Think of the Proprietor Drawing Account as a virtual bank account. i.e. transfers will reflect movements between the business/you personally and vice versa.
If your Accountant or you produce a balance sheet, capital introduced and/or drawings can be tracked from the Proprietor Drawings Account, when preparing the balance sheet it’s good practice to journal the balance from 1202 to 3100 (Proprietor or Partner Drawings), hence the 3100 nominal code.
Do you have to use account 1202? I am a sole trader and had an instance where some cash was introduced into the business. I went straight for account 3100 as this is a true capital account (in double-entry terms) and the rules say that to increase a capital account, you credit it (as it is a liability to the business). This cash introduction now, correctly, shows on the balance sheet as an addition to p&l account figure in capital & reserves.
On this theme, I am planning to take my wife out for a meal to celebrate a little milestone in the business. The business will stand the cost so how would I record this in double entry speak? One leg must be Cr bank, would the other be Dr 7403 (UK entertaining)? If I am correct in this, is this seen as a business expense and not drawings?