In this article I will use the term Director and Business owner. Usually a business owner is a director of the business. Sole traders and partnerships are different to Limited Liability companies in that they own everything themselves while in a Limited Liability Company the Director or Business owner owns shares in the business but has no right to any of the business assets for his own private use. He or she is treated in the business as an employee and has no right to take anything from the company and must follow company law in regards to any transactions with the business e.g. borrowing money from the business.

Directors Salary

A Director gets a salary. It is better to agree a salary at the beginning of the year and if the company performs well over the year, increase it (or decrease it, if necessary). Avoid leaving it to the end of the year to work out what your gross salary should have been. Keep reviewing the amount being paid to the directors and what the cost in taxes will be so that you don't accumulate a big tax bill at the end of the year. By defining what the directors salary is for the year, you will then know the net pay he should be taking home and any money taken above the amount may then be treated as a directors loan.

Directors Expenses

Directors buy stuff for the business using their own money. This could be because the credit limit on his business card was lower than the amount needed to pay for an item, so the director used his own personal credit card to pay for the item. He should then give the invoice to the company and be refunded by the business for the value of the invoice.

On a monthly basis he can list all the items he bought on a claim form and be paid back the money he spent. If the business is not in a position to pay him back immediately, he will be come a creditor i.e. someone who is owed money by the company.

Set up a supplier account in your accounts system under the directors name and record all his purchases on behalf of the business here. In this way you will know exactly how much he has to be paid back.

Directors Loans to the company

Business owners usually have to put money into their business to get it started. This may be personal savings, or a personal bank loan. The money is then lodged into the company's bank account for company use. This money is owed back to the business owner which is usually paid back when the business starts making money.

Set up a "Directors Loan" nominal ledger account in the nominal ledger. It should be a long term liability nominal ledger account

NOTE: Keep this money separate from loans from the company to the directors' if there are some.

Directors Loans form the company

While a business owner can loan unlimited amounts of money to his business, there are legal restrictions as to home much they can borrow from the business and are usually restricted to a percentage of the value of the business. So set up a "Directors Loan" nominal ledger account (it is a current asset) and keep this separate from any directors loans to the company if there are any.

Subsistence expenses

In many industries you can claim fixed daily expenses without the need to produce receipts for the expenses. This is normally for lunch expenses A director may be entitled to these and they should be paid as part of his salary. They are usually tax free and are a cost to the business. A code in the nominal ledger for Directors Subsistence expenses should be set up and when the wages journals are posted, the subsistence expenses will come across in the wages figures automatically.

Drawings

This is the catch all term for money form the business that is not defined as to exactly what it is e.g. wages, loans, subsistence etc. This happens where the Director needs to be paid money for his own personal living expenses, but right now he does not know where he will take the money from. The first place to record this information is in the Directors loan account, but if there is none, then set up a drawings account in the nominal ledger under current liabilities. Later on you can transfer the transaction out of this account to the correct account whatever that may be.

Small business owners (directors) would like not to have to give loans to their business or take money put of the business as a loan. They would like to get a salary and be taxed on that. Unfortunately this does not always happen, especially in times of business uncertainty when money is tight.

The key to managing the directors taking money out and putting money into the business is to deal with each transaction as it comes and ensure you record it in the most appropriate account as explained above.

(c) www.helpforbookkeepers.com 2009