Hi All,
Could you tell me what the double entry is for the transfer of cash (say £1000) from one company to another company?
The money does not need to be repaid.
Would this be treated as a loan which is written off or a donation?
Thanks
Replies (11)
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Why is the transfer being made? Do the two companies by any chance have the same shareholder(s)?
Is there any special reason why it is not to be treated as a loan, which would be normal?
Are you the external accountant advising the companies and their shareholder, or an employee of one or both of the companies?
Well if I were you I would advise that a simple loan is the best option as it preserves the opportunity to remove the funds tax free from the recipient company in the future. It can't be in the interests of the "lending" company or its shareholder, to forego that opportunity. So that is advice you need to give in any event.
If shareholder does not wish to take that advice that is up to him. Next question then will be what alternatives are there. One way is Dr DLA in "lending" company and Cr DLA in recipient company. If there is a history of converting Cr balances on DLA to shares take instructions on whether the recipient company to issuing new shares.
The transfer in the "lending" company can't "go to equity" as it is a debit.
I would try and avoid having donations received and paid in the P&L accounts of the two companies. This would look very odd, clumsy and not properly thought out. The realty here is that the shareholder is withdrawing cash from one of his companies and investing it in another.
Taking assets out of one company...
... and putting them in another company under the same control is a distribution, taxable as a dividend on the shareholders.
Unless it's a loan
... and putting them in another company under the same control is a distribution, taxable as a dividend on the shareholders.
... unless it's a loan
That is precisely why it is not in the shareholder's interest to capitalise loans, and makes it all the more important that you cover yourself in writing by advising him of the problems it can lead to when he wants to take his money out again, so that he does not hold you responsible for the problems he has.
The difficulty here is that we don't know what steps were taken when the loans were "re-classified" and whether any of those steps preclude the loans still being loans for tax purposes.
What do the accounts say about the status of the "other reserves".
If they are no longer loans for tax purposes the debit in the books of the paying company is either a loan to the shareholder, which may have tax consequences, or, as Steve says, a distribution to him, which will be taxable income in his hands.