I have a client that runs a limited company (first year of trading) I'm not sure why she is a limited company but she is and I am leaving it at that - I don't want to be advising people on something I know nothing about.
I have set her up on payroll to take say 600.00 a month (I can't remember at the top of my head how much exactly) so this goes through in the accounts but she never actually takes this money out but takes money out of the bank randomly and pays her rent straight from the business bank account.
I know that this is not the way it's supposed to be done but it is the way it has been done so I'm just going to deal with it (she'll never listen) so my question is how can I record this?
Do I just offset the drawings to the salary she has never taken out and then put the remainder in to the directors current account?
it's not drawings (although I too use the line interchangably at times).
The easiest approach is to take the directors salary direct to he Directors loan account and treat money drawn from the business as a reduction in the DLA.
At the end of the year you may find that the business owes the director money. Unlike an overdrawn DLA that can be left there ad infinitum (or at least until the director takes it).
After the first period remember that it would be a balance sheet only item with no effect on profit in future periods as everything has been accounted for through the P&L in the cirrent period.
Hope that makes sense,
kind regards,
Shaun.
p.s. There are lots of reasons to be a limited company not least the fact that many medium and large businesses will not deal at all with the self employed.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
I get this with most of mine and just journal it to wages through the DLA. With some they take out monthly chunks so when Im keying it I will apportion part as wages, but it works the same in the end.
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Joanne
Winner of Bookkeeper of the Year 2015, 2016 & 2017
Thoughts are my own/not to be regarded as official advice,which should be sought from a suitably qualified Accountant.
You should check out answers with reference to the legal position
Yes, all goes in and out of the Directors Loan account. Very common practice.
Be wary about how much is coming out of the loan account. Whilst dividends can be voted later to cover 'drawings' the profits do need to be their to do so. If they are funding using bank overdrafts or loans then this could cause an overdraw Directors Loan account to occur.
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Phil Hendy, The Accountancy Mentor
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Yes, all goes in and out of the Directors Loan account. Very common practice.
Be wary about how much is coming out of the loan account. Whilst dividends can be voted later to cover 'drawings' the profits do need to be their to do so. If they are funding using bank overdrafts or loans then this could cause an overdraw Directors Loan account to occur.
Sorry Phil, I think that I need to disagree a little in this instance.
The director from the original question is loaning money to the company (not taking their awarded salary which is being processed through RTI) so the DLA is positive and can be drawn against. And carried forwards without penalty. With no dividends involved.
Also, a minor clarification for readers who may have misunderstood your comment about profit, its a common misconception that dividends may only be declared against current year P&L profits but such actually also included retained earnings so it is possible to quite legally declare a dividend for more than the profit on the P&L.
kindest regards,
Shaun.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
I read Phil's comment as a general warning if a Director drew out more than salary paid in, without their being sufficient retained profit (or retained earnings) being available.
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John
Any advice given is for general guidance and professional advice should be sought applicable to your circumstances.
She has definitely taking more drawings out than the salary set up.....what would the implications of this be? I have't quite finished yet but it's starting to look like she hasn't made enough profit to cover the drawings either!!!
If the DLA account is overdrawn at the end of the financial year, the balance (after allowing for any retained profit) will then either have to be repaid within 9 months or pay a tax charge of 25% + interest
This link gives more details. http://www.taxassist.co.uk/resources/show-article/id/3
If she has an accountant they will work all this out and declare it on the CT600A
-- Edited by Leger on Friday 17th of July 2015 02:17:18 PM
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John
Any advice given is for general guidance and professional advice should be sought applicable to your circumstances.
