Accounting for cash put into Ltd

Accounting for cash put into Ltd

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Hi, this is question regarding how best to account for cash put into the business.
I'm currently preparing accounts for my husband's business which operates as Ltd. I work in Finance (indusrty not practice though) and I'm 3 exams away from qualifying with ACCA. I believe I can manage but there things which I'm really not sure if I account for in the best possible way.
My husband sometimes uses cash to purchase materials or pay for expenses. The cash is basically out of his pocket and put into the business. For that reason the total balance of the cash used is showing in the BS in creditors as being owed to my husband.
Is there a better way of accounting for this?
I am not comfortable with continue adding to the creditors. There is probably something I'm missing.
Any suggestions will be greatly appreciated.
Thank you in advance.

Replies (8)

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By tom123
21st Dec 2014 08:36

Directors current account

Does the company also have it's own bank account?

In any case, I would post the entries as follows:

 

Dr Expense

Cr Directors current account (often referred to as Directors Loan account).

If the director is owed money then he is a creditor of the company, although I would not include him within trade creditors, rather other creditors.

I would not be tempted to describe the directors balance as 'cash' though, as it is clearly not.

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RLI
By lionofludesch
21st Dec 2014 12:15

Creditor

Agree with Tom.  If the company owes money to the director, that's a creditor (but not a trade creditor).

Unless the director fancies donating this money to the company (which I wouldn't do personally), I think you're stuck with this extra creditor.

You certainly can't treat it as a minus cash balance or deduct it from a credit bank balance. If you wanted to do this, you need to square up the director with a cheque before the year end.

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By Paige
21st Dec 2014 18:30

Agree with the Above. I too dal with my partner's Accounts, he sometimes does this too. Any time he puts our personal money into the business I always DR the relevant expense & CR the Director's Loan Account.

This is also how I dealt with moving Assets from Sole Trader to LTD. Throughout the year any monies he has withdrawn in excess of his salary, first goes to the Director's Loan Account & then to Dividends.

 

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By Daniella Toncheva
22nd Dec 2014 19:18

DR Loan account
Thank you All for your comments, much appreciated, I understand what I'll need change.
One last thing - because is relatively new business my husband would prefer to leave some of the cash into the business. I believe the most appropriate would be to increase the capital by issuing additional shares for the value. Am I correct?

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By tom123
22nd Dec 2014 20:00

Just leave it as other creditors.

If you capitalise the loaned money into ordinary shares you would not, easily, be able to withdraw it. In the absence of compelling requirements from elsewhere, (such as bank funding or something) I would just increase the creditor balance as required.

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By Daniella Toncheva
24th Dec 2014 00:01

Thank you Tom, I was not very comfortable increasing the capital. I'm not very comfortable seeing creditors increasing either, but I believe ones the business starts making stable profits the money can be paid back to the director...

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By DKB-Sheffield
24th Dec 2014 13:24

DCA/ DLA all the way

Hi Daniella,

I answer to your last post, the money in the director's loan account (by which I mean credit balance) can be withdrawn at any time without tax implications as effectively, your husband's "cash" is money he will have used from taxed earnings. Indeed, if you have the cashflow available, the business does not even need to be profitable to make the withdrawal. Don't confuse the "cash payments" with salary or dividends, they are a true loan.

What I would do in the full accounts is make due reference in a note (either transactions with directors or related party transactions) along the lines of:

"J Smith is a director and shareholder in the company. At the year end a balance of £XX (20XX : £XX) included in other creditors was due to to J Smith. This was the result of financing provided through the director's current account to the company and is repayable on demand. At no point during the year did J Smith owe money to the company"

The above is a quick draft of the note and should be amended accordingly. However, what it does show is that the directors of the company are willing to support the business financially in its infancy. Also, banks will tend to ignore director's loan accounts and treat them as a "lesser debt" than suppliers and commercial loans.

Unless I get shot down in flames, this note is not required for the abbreviated accounts and hence, you can choose to omit it.

Finally, I agree with Tom do not capitalise the debt. You are not a traded company, I do not believe you are looking at selling the business and you don't seem to be after a bank loan. So why would you look to increase the share value and tie up more funds in the business. If for example your husband owns 100% of the share capital now (say 100 shares of £1), he will still only own 100% of the share capital (say 5,000 shares of £1) if he capitalised £4,900 of the debt. The difference is, he can currently drawdown £4,900 from his loan account but, post capitalisation, he couldn't drawdown any! Keep it simple and keep it liquid!

Kind regards

Dave

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By Daniella Toncheva
20th Jan 2015 14:09

Dave, just to say thank you to you as well, really helpful comment.
Happy and successful new year to all!!!

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