Water scarcity is the most critical constraint for sustainable cotton production in Xinjiang Province, northwest China. Drip irrigation under mulch is a major water-saving irrigation method that has been widely practiced for cotton production in Xinjiang. The performance of such an irrigation system should be evaluated for proper design and management. Therefore, a field experiment and a simulation study were conducted to (1) determine a modeling approach that can be applied to manage drip irrigation under mulch for cotton production in this region; and (2) examine the effects of irrigation amount and mulch on soil water distribution and root zone water balance components. In the experiment, four irrigation treatments were used: T1, 166.5 m3; T2, 140.4 m3; T3, 115.4 m3; and T4: 102.3 m3. The HYDRUS-2D model was calibrated, validated, and applied with the data obtained in this experiment. Soil water balance in the 0–70 cm soil profile was simulated. Results indicate that the observed soil water content and the simulated results obtained with HYDRUS-2D are in good agreement. The radius of the wetting pattern, root water uptake, and evaporation decreased as the amount of irrigation was reduced from T1 to T4, while a lot of stored soil water in the root zone was utilized and a huge amount of water was recharged from the layer below 70 cm to compensate for the decrease in irrigation amount. Mulch significantly reduced evaporation by 11.7 mm and increased root water uptake by 11.2 mm. Our simulation study suggests that this model can be applied to provide assistance in designing drip irrigation systems and developing irrigation strategies.