Overdrawn Directors Loan Account

Overdrawn Directors Loan Account

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Hello Folks

I've had a look at this link https://www.accountingweb.co.uk/topic/tax/directors-loan-accounts-get-details-right/465775 all of which makes sense.

I have a client who is the only shareholder and director of a limited company. At 31 March, the loan account was overdrawn by £3K which they wish to write off. The overdrawn balance has arisen due to the client taking dividends which weren't there in the first place as there were insufficient reserves.

As the loan is less than £5K there is no P11D issue.

In terms of accounting for the write off, the client is aware that this will be treated as dividend income and is proposing to write off the amount at the end of May by DR the DLA and CR Distributable Reserves. My understanding was that the write off should hit the P&L as an administrative cost? Does this accounting treatment appear reasonable?

The payment will be charged for Class 1 NI purposes via the payroll.

Thanks for any advice.

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By gitom
25th Apr 2013 15:05

Journal back to front?

If the DLA is overdrawn it will already have a DR balance.  To write the loan off it would be DR P&L / Dividend / whatever, CR DLA.

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By johngroganjga
25th Apr 2013 15:42

Yes your journal entry is back to front.  The debit can't go direct to distributable reserves although of course that's where it ultimately ends up.  It either has to go first through the P& L (as loan waived) or as a dividend, depending on what you decide.

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By User deleted
25th Apr 2013 16:06

Why NI?

I'm well aware of HMRC's views on this, but I remain of the opinion that they need to be challenged. In this case, it would seem that that the write-off has nothing ro do with earnings, deemed or otherwise. I would not account for NI - if HMRC want to pursue what will be a tirvial amount, let them.

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