I am a sole proprioriety company. When I need to pay out money for personal use, I have been using an account called owners withdrawals. Example, When I need to pay the utilities for myself, the entry is as follows: Debit to owners withdrawal and credit to the checking account. I have been in business for about 5 years. and the owners withdrawal account as accumulated over the years. This distorts my financial statements. How can I adjust the balance of this account each year, so that it does not show such a large amount.
Great question, thank you.
Each year you should be doing what is known as a closing entry. This will close the balance of all your equity accounts through retained earnings.
You will do this by posting an entry on January 1 of each year, crediting owners draw to clear the previous years entries and debiting retained earnings.