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How can a directors loan occur. - A Sole Trader changes to being a limited company. The difference between what the company took over in assets less any liabilities is the amount of the loan due to the director i.e. the difference. Set up a Directors Loan A/c to record each asset and liability transferred over to the company.
- Director loaning money to company. The company needs cash so the director loans cash to the company. Set up a directors loan a/c. If the loan is going to be paid off by monthly instalments to the director, then keep this loan separate from any other directors loans and enter each payment against this nominal account.
- Director not taking full salary. The company has a problem with cash, so the director does not take the net salary due to him immediately. He may take it at a later time. Set up a Directors Net Pay Control A/c to record any salary taxed but not taken by the director.
- Director not taking expenses when they come due. If you have set up a suppliers account to process the directors expenses, there may be a a balance owing on this account. You may transfer out of this account the balance owed to the director to the directors loan a/c. Only keep the balance in the expenses account if you plan on paying it to the director within 12 months.
- Director taking money from the company. The director may need money and decides to take the money from the company instead of borrowing it from the bank or taking a salary. There may be tax implications in the future and the tax man may come looking for the director to pay tax on this money he took. He may be owed the money because of a directors loan account and this would be tretaed as repayments of that loan.
- Director giving assets to the company. If a company director has his own car and decides that he wishes to give the car to the company in return for cash or a reduction in the director' s loan account or the creation of a directors loan account, the value of the car must be realistic. The reason for giving the car to the company may be so that the company begins to pay for all motor costs rather that the director claiming expenses and mileage allowances for the car.
- Director taking stock items for personal use. If a director takes stock for his own use, a sales invoice should be raised for the amount taken. If this is not done, then the value of the stock taken must be added to the directors loan account and the cost of sales account should also be credited.
Partnerships In a partnership, one of the partners may loan money to the partnership and this would be treated as a loan from the partner. A nominal account for Partners loan should be setup in the partners name.
Sole trader All the money in a sole trader business is the sole traders money, so their are never loans from the sole trader to himself. Any money he takes from the business are called drawings. They do not reduce his profit as they are not an expense, but they do affect his cashflow. Nominal Ledger setup If a director is constantly moving money in and out of the business (this can happen when the director may decide his full salary for the year at the end of the year and takes money, but does not tax it until the end of the year) It is better to set up a directors loan account (sometimes called a directors current a/c). This way all money in and out is recorded and easy to see. The balance on the account is the directors net pay. So his gross pay must be calculated to ensure his net pay covers the amount he withdrew from the business. Some directors treat a business bank account as their own account. This is not a good way to treat it because, the money is not the directors. So document every movement in its own nominal account. If a director does loan money to the company, keep this as another separate account so that you know how much of this loan has been repaid. If multiple directors give multiple loans, then set up a loan account for each director that loans money to the company. It can be illegal for a director to take money out of the business especially if it forces the company into cash flow problems and a director may be prosecuted under law. If you are recording a directors loan account for a director, keep them up to date on what is owed to them or more importantly how much they owe back to the business by printing out each nominal ledger directors loan account you are recording in your accounts system for them. |
