Cash withdrawn for personal use journal entry

Overview

In business, the owner may have a need to withdraw cash for personal use for various reasons. Likewise, the company needs to make the journal entry for the cash withdrawn for personal use by the owner in order to account for the outflow of cash from the business.

In accounting, the cash withdrawn for personal use by the owner is not an expense but a reduction of the owner’s equity. This is due to the cash withdrawn from the company, in this case, is not for the business purpose and the company is a separate entity from its owner.

In the chart of accounts, we usually have a separate account, e.g. withdrawals account, to record the cash withdrawn for personal use by the owner instead of recording it directly as the deduction of the owner’s capital. This is so that we can keep a record of the withdrawal transactions in each period of accounting.

However, sometimes, the company may not have the account to record the withdrawal transaction and it never bothers to create one for some reasons, such as it rarely has any withdrawal transaction at all. In this case, we usually need to deduct the withdrawal amount directly from the capital account to account for the cash outflow from the company.

Cash withdrawn for personal use journal entry

We can make the journal entry for the cash withdrawn for personal use by debiting the withdrawals account and crediting the cash account.

Withdrawals account is an account in an equity section in which its normal balance is on the debit side. This withdrawals account will show up on the statement of owner’s equity as a deduction to the owner’s capital at the end of the accounting period.

Likewise, in this journal entry, both the total equity and total assets on the balance sheet decrease by the same amount of the withdrawal.

As mentioned, we usually use the withdrawals account to keep a record of the withdrawal transaction so that we can determine the total amount of withdrawals in each period. However, if we do not bother to keep the record of the withdrawal transaction for some reason, we may just directly deduct the cash withdrawn from the owner’s capital.

If this is the case, there won’t be any withdrawal account in the journal entry for the cash withdrawn for personal use by the owner. Instead, there will be a debit of the owner’s capital account together with the credit of cash.

In this journal entry, the owner’s capital will directly be reduced by the withdrawal amount in order to account for the cash reduction as a result of the withdrawal by the owner of the company.

Cash withdrawn for personal use example

For example, on November 30, the owner of the company ABC has withdrawn $50,000 from the company for personal use. The company ABC has a withdrawals account in its chart of accounts to record all withdrawals transactions by its owner due to the frequency of withdrawal transactions.

In this case, we can make the journal entry for the $50,000 cash withdrawn for personal use on November 30, by debiting the $50,000 into the withdrawals account and crediting the same amount into the cash account.

In this journal entry, both total equity and total assets decrease by $50,000 as of November 30. This $50,000 of withdrawals will show up on the statement of owner’s equity as a deduction to the capital when we prepare the statement at the end of the accounting period.

Example 2:

For the second example, on December 15, the owner of the company XYZ has withdrawn $10,000 from the company for spending on the holiday in the near future with his family. The withdrawal is completely for personal use as it has nothing to do with the company’s business.

However, the company XYZ doesn’t have a withdrawals account in its chart of accounts as the withdrawal event is a rare occurrence. And the company XYZ doesn’t bother to create one either.

In this case, we need to make the journal entry for the cash withdrawn for personal use by the owner of the company XYZ on December 15, by directly deducting the $10,000 from the owner’s capital account as below: