Withdrawing Salary from Owner's Equity Account

Question

After meeting with my accountant here in the US, I was informed that with my company being a sole member, I should not pay myself a salary that would hit the direct expenses account but instead should take a "draw" that hits the balance sheet and not the expenses. Can you please advise how I should set this up in ERP Next please?

Answer

1. Create an account for Owner's Equity under Liabilities if you already do not have. This account will be your investment in the business and the accumulated profits (or losses). It will have a "Credit" type balance.
2. In an Version 5, Equity will be a new head (not under Liabilities). (In either case Assets = Owner's Equity + Liabilities, so your balance sheet will be okay Learn more about owner's equity account).
3. Create an account for Owner's Draws under Owner's Equity.
4. Note that the balance of Owner's Draws will always be negative since you are reducing money from your total equity / profits.

Example

Example journal entry (using Journal Voucher in ERPNext) for a withdrawal of $1000 would be:

1. Credit Cash $1000
2. Debit Owner's Draws $1000