Private withdrawal refers in accounting to the process by which an entrepreneur or partner withdraws assets (cash, goods, services) from the business assets for private purposes. These withdrawals reduce the business assets or equity, but do not constitute business expenses in the tax-law sense.
Economic and legal significance
For freelancers and sole proprietors as well as for partnerships (e.g., GbR, OHG), private withdrawals are part of normal payment transactions. Commercial law (HGB) and tax law (in particular EStG and UStG) clearly distinguish between withdrawals and business expenses:
- Private withdrawals reduce equity but do not directly affect taxable profit, since they are not business expenses.
- For VAT-liable businesses, withdrawals of goods or services may have to be treated for VAT purposes as own consumption (self-supply); this does not apply if the small-business regulation (§19 UStG) is used.
- For capital companies (e.g., GmbH) the term “private withdrawal” in this form is uncommon; private use of company assets can be treated as a hidden profit distribution or as a loan and can have tax disadvantages.
Accounting recognition and typical journal entries
Private withdrawals are recorded in double-entry bookkeeping on a private account or drawings account (contra equity). The aim is a clear separation between business and private assets.
Typical journal entries
- Cash withdrawal: Private withdrawal to Cash (e.g., 1,000 EUR)
- Bank transfer for private purposes: Private withdrawal to Bank (e.g., transfer by the entrepreneur to his private account)
- Goods withdrawal: Private withdrawal to Inventory (value of goods taken)
At year-end the balance of the private account is closed against the equity account, which changes the reported equity.
VAT and income tax implications
Two tax aspects are particularly relevant:
- VAT: Withdrawals of goods or services for private use must be treated for VAT purposes as withdrawals/self-consumption. They should be valued at the applicable VAT rate (e.g., 19% or 7%) and reported accordingly, unless you fall under the small-business regulation (§19 UStG).
- Income tax: Private withdrawals do not reduce taxable profit. For profit determination under the EStG (both for balance-sheet accounting and for the income surplus calculation/EÜR) withdrawals are not recognised; expenses for private purposes are not tax-deductible.
For goods withdrawals an input tax correction may also be necessary if input VAT was claimed when the goods were acquired. Keep all supporting documents and document the withdrawal value in a verifiable way.
Practical tips and examples for everyday business
Practical handling and documentation are central to avoid inquiries from the tax office:
- Maintain a separate private account (drawings account) in the ledger to clearly show withdrawals.
- Document each withdrawal with date, amount, purpose and supporting document (cash receipt, bank statement).
- Avoid mixing business and private accounts; set up a separate business account early.
- For recurring withdrawals (e.g., compensation in lieu of salary for the entrepreneur) consider a fixed withdrawal arrangement or an appropriate managing-director remuneration to minimise tax risks.
Specific examples
- Cash withdrawal example: You withdraw 1,000 EUR in cash. Entry: Private withdrawal to Cash 1,000 EUR. At year-end equity is reduced by this amount.
- Goods withdrawal example: You take goods with a net value of 500 EUR. At 19% VAT the withdrawal value is 595 EUR. VAT-liable businesses must record the withdrawal as own consumption and account for VAT; small businesses under §19 UStG are exempt.
Risks and measures to avoid problems
Unclear or insufficiently documented withdrawals often trigger tax audits. The following measures reduce risks:
- Regular reconciliation of the private account with account statements.
- Correct treatment of goods withdrawals under the UStG, with input tax correction where applicable.
- For capital companies: No unexplained payments to shareholders; choose clear contractual bases (salary, loan, profit distribution) to avoid hidden profit distributions.
- When in doubt, obtain tax advice from a tax advisor, especially for large or unusual withdrawals.