Capital and drawings accounts for sole traders

A sole trader’s capital account records what the owner has in the business: money and assets put in, plus profits, less losses and drawings. Drawings are collected in a separate drawings account during the year and transferred to capital at the year end, along with the profit or loss. The closing balance on the capital account is the figure that balances the business’s assets less liabilities.

Why does a sole trader need a capital account at all?

In law a sole trader and the business are the same person, but the books treat the business as a separate entity so that its results can be measured. The capital account is the link between the two. ACCA’s explanation of the accounting equation puts it simply: capital equals assets less liabilities, and it consists of capital introduced by the owner plus or minus profits or losses, with drawings reducing it.

This page is about how those entries are recorded. Whether drawings are taxed is a separate question, covered in drawings for sole traders; in short, the tax charge is on profit, and GOV.UK confirms that allowable expenses do not include money taken from the business for personal use.

How is money or an asset put into the business recorded?

Capital introduced is a credit to the capital account. The debit goes to whatever the business received:

• Cash paid into the business bank account: debit bank, credit capital.
• A personal asset brought into business use, such as a van or computer the owner already had: debit the asset account, credit capital. For capital allowances, section 13 of the Capital Allowances Act 2001 treats the owner as incurring expenditure equal to the asset’s market value on the date it is brought into use, capped at what it originally cost.
• A business expense paid from a personal card: debit the expense, credit capital (or a separate owner’s account that is cleared to capital at the year end).

A loan the owner takes out personally and pays into the business is still capital introduced from the business’s point of view; the business has no liability to the lender. Interest on it is a separate tax question, discussed in interest and bank charges for sole traders.

How are drawings recorded?

Drawings are anything the owner takes out for personal use. They are debited to a drawings account, not to expenses and not straight to capital, so the year’s total is visible in one place:

• Cash or transfers to the owner: debit drawings, credit bank.
• Personal bills paid from the business account, such as council tax on the home or a family holiday: debit drawings, credit bank.
• Stock taken for personal use: debit drawings, credit purchases or sales. For tax, the SA103F notes ask for the disallowable amount in box 60, usually the cost, but the normal sale price if traditional accounting is used. See goods taken for own use.
• The private share of a mixed use cost: either debit drawings with the private share when the cost is posted, or post it all as an expense and make a private use adjustment in the tax computation.

A payment to the owner described as wages or salary is still drawings. The SA103F notes state that the owner’s salary, wages or drawings are not allowable expenses.

What happens to the capital account at the year end?

Once the profit and loss account is complete, two closing entries are made. The profit is credited to capital (a loss is debited), and the drawings account is closed by debiting capital and crediting drawings. The drawings account then starts the next year at nil, while the capital account carries forward. The full sequence is set out in year end closing entries.

The balance sheet usually shows the movement rather than just the closing figure: opening capital, add capital introduced, add profit, less drawings, closing capital. That presentation lets anyone reading the accounts see at a glance whether the owner is taking out more than the business earns.

What does the capital account look like in practice?

Illustration only. Amira starts the year with a capital balance of £8,000. In the year she pays £3,000 of savings into the business account, and moves her own laptop into the business at a value of £400. The business makes a profit of £32,000. She transfers £24,000 to her personal account, the business pays her £1,200 personal phone contract, and she takes stock costing £300 for family use.

Capital account	£
Balance at start of year	8,000
Capital introduced (£3,000 cash and £400 laptop)	3,400
Net profit for the year	32,000
Drawings (£24,000 transfers, £1,200 phone, £300 stock)	(25,500)
Balance at end of year	17,900

If Amira’s assets less liabilities at the year end do not come to £17,900, something has been missed, most often a personal payment from the business account or a business cost paid personally.

Where does the capital account appear on the tax return?

The full self employment pages (SA103F) include an optional balance sheet section. If the business accounts include a balance sheet, the trader fills in the capital account boxes: box 95 balance at start of period, box 96 net profit or loss, box 97 capital introduced, box 98 drawings and box 99 balance at end of period. The notes say to show an overdrawn capital balance with a minus sign. If there is no balance sheet, the section is left blank.

HMRC’s Enquiry Manual at EM3555 notes that a trader is not obliged to create a balance sheet, but says the trader should keep a record of money taken for personal or family use, whether from business cash, the business bank account or, where there is no separate business account, the personal account. GOV.UK’s record keeping guidance for traders using traditional accounting also lists how much has been invested in the business and how much has been taken out for own use.

What does an overdrawn capital account mean?

A capital account goes overdrawn when drawings over time exceed capital introduced plus profits. It is a warning that the owner is funding personal spending from business borrowing or by not paying creditors. It also has a tax consequence: interest on a business overdraft or loan may be partly disallowed if the borrowing has in effect funded drawings. HMRC’s Business Income Manual at BIM45705 says an overdrawn capital account is only an indication, and that HMRC must show that private drawings caused it and that bank borrowing funded it, citing Silk v Fletcher.

What mistakes come up most often?

• Drawings as a balancing figure. If drawings are simply whatever makes the bank reconcile, nobody has checked them. EM3555 tells enquiry officers to look for exactly this and to test it with a personal cash flow analysis.
• Capital introduced recorded as sales. Savings or loans paid into the business account and posted as income overstate profit. The reverse, undeclared takings described as capital introduced, is a classic enquiry point, so keep evidence of where introduced money came from.
• Personal costs left in expenses. Private bills paid from the business account belong in drawings, not in motor, phone or sundry expenses.
• Owner’s wages in the payroll or wages line. Payments to the owner are drawings whatever they are called.
• Forgetting the year end transfer, so drawings keep accumulating across years and the capital account no longer reconciles. When starting new software, set the capital figure correctly in the opening balances.

On incorporation, the capital account disappears. The company’s equity is share capital and retained earnings, and money the owner takes out becomes salary, dividends or a director’s loan; see sole trader vs limited company.

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Related Accountapedia entries

• Debits and credits: the rules explained
• Single entry bookkeeping vs double entry
• Double entry bookkeeping explained
• Preparing accounts from incomplete records
• The year end stock journal

Sources

• ACCA: Accounting equation
• GOV.UK: Expenses if youre self employed
• legislation.gov.uk: Act 2001 c. 2, section 13
• GOV.UK: Self assessment self employment full sa103f
• GOV.UK: Manual page EM3555
• GOV.UK: What records to keep
• GOV.UK: Manual page BIM45705

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.