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Accounting for loan to director/shareholder written off

Accounting for loan to director/shareholder...

I have the situation where a sole director/shareholder in a small ltd co had their overdrawn loan from the company written off. Basically there were insufficient reserves to clear it with a dividend. I understand the tax consequences but am unsure as to how to account for it. The paperwork has dealt with it in terms of a loan to a shareholder that has been written off. That being the case, where do I stick it in the accounts? There seems to be a choice of treating it as an expense in the detailed P&L (i.e. before operating profit) or putting it under the heading of dividends on the basis that it is a distribution to a shareholder. The latter seems the most logical.

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By blok
23rd Jun 2011 13:02

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Not sure I would class as dividend.  It may be treated as such for income tax purposes, but the reality is that it is an irecoverable debt.

I  would class as amounts written of debts on the face of the p&L (if material) or under admin costs if not material.

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23rd Jun 2011 13:31

Surely

if there are insufficient funds to cover a divi they should be made to pay it back!  Interested to see what others think.

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By blok
23rd Jun 2011 14:08

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The issue is that no dividend was paid. The company has decided not to pursue a debt owed to it and it has decided to write if off.  It is only tax legislation that treats it as a dividend (distribution actually) in the hands of the shareholder.  Not to be confused by the company paying illegal dividends.  

There is a subtle but important difference here.  Problem is that with small companies its hard to determine the difference sometimes.

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By Monsoon
23rd Jun 2011 14:31

Overdrawn DLA write off

Credit DLA to clear, Debit P&L account and disallow for corporation tax.

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