Money you take out of the practice, and money you put into it, isn't income or an expense. It belongs on the Balance Sheet, in equity. When it lands on the P&L instead, your profit is wrong, and so is every decision you base on it.
What draws and contributions are
An owner draw is money the practice pays to you as the owner. In an S corp it's called a distribution. A contribution is money you put into the practice from your own pocket, like covering a slow month or buying equipment.
Neither one is something the practice earned or spent to run the business. They're money moving between you and the practice.
What goes wrong when they hit the P&L
- A draw recorded as an expense makes profit look lower than it is. You might think you can't afford a hire you can afford.
- A contribution recorded as income makes revenue look higher than it is. You might think the panel is paying for more than it is.
- Your CPA has to find and undo them at tax time, which costs you time and fees.
In a made-up example, a practice brings in $32,000 from members in a month and spends $24,000 to run. The owner takes $6,000 home and also puts $5,000 back in to cover a big equipment payment. If the draw is booked as an expense and the $5,000 as income, the P&L shows revenue of $37,000, expenses of $30,000 and profit of $7,000. The real numbers are $32,000, $24,000 and $8,000. Both wrong numbers look believable, which is the problem.
Where they belong
Both go to equity accounts on the Balance Sheet. Draws or distributions reduce equity. Contributions increase it. The P&L stays about the business, and the Balance Sheet shows what you've taken out and put in over time.
If money you put in was meant as a loan to the practice, it's recorded differently again, as a liability the practice owes you. That choice is your CPA's to make. This post explains contribution versus loan.
How to spot it in your own books
- Look for an expense category named something like owner pay, draws or personal.
- Look for income that matches transfers from your personal account.
- Compare transfers to your personal account on the bank statement with what the P&L shows.
What I'd do this week
- Pull last month's P&L and scan every income and expense line for transfers between you and the practice.
- Make each transfer to or from yourself its own transaction with a clear memo.
- Ask your bookkeeper where draws and contributions are recorded. The answer should be equity.
Common questions
If draws aren't an expense, do they lower my taxes?
No. With a sole proprietorship or an S corp, profit is taxed whether you take it out or not. Your CPA can explain how it works for your setup.
What about my salary in an S corp?
Salary through payroll is different. It is an expense on the P&L. Distributions on top of salary are not.
I paid a practice bill from my personal card. Is that a contribution?
Usually, yes, unless the practice pays you back. Send your bookkeeper the receipt so the expense lands in the right category either way.
Want a P&L that shows the real business?
We keep your draws, contributions and salary out of the wrong places every month, so profit means what it says. If that's what you need, apply to work with us.