Non-existent reserved profits on balance sheet

On our balance sheet there are reserved profits on balance sheet that have been spent. Illegal?

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I have found out that on our balance sheet that there are £1.2m of reserved profits that have been spent. The money does not exist. Our Director's are about to use this non-existent and therefore not distributable "money" to offset Directors loans. Is it an offence to show non-existent money as reserved profits on balance sheet? And is it an offence to use this to pay off Directors loans? I am Office Manager and responsible for accounts team and are very worried. Directors have also been hiding a lot of money they take monthly from company bank account and not declare as Directors loans. 

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By johngroganjga
10th Dec 2023 23:09

I am guessing that by “reserved profits” you mean what everyone else calls retained profits.

What do you mean by saying that the retained profits “have been spent”. Do you mean that dividends have been paid that have been debited elsewhere than retained profits. If so, where have they been debited?

What do you mean by “the money does not exist”? What money (aka cash) does not exist?

If you are asking whether it is an offence for surplus cash to be used to repay loans from directors, why on earth would you think it would be?

You say payments by the company to directors have not been accounted for as loans to them. How have they been accounted for then?

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Replying to johngroganjga:
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By I'msorryIhaven'taclue
11th Dec 2023 09:09

johngroganjga wrote:

I am guessing that by “reserved profits” you mean what everyone else calls retained profits.

Or reserves.

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By johngroganjga
10th Dec 2023 23:10

.

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By Yossarian
10th Dec 2023 23:40

The assets of a company don't have to be held as cash. A company could quite possibly have equipment, stock, debtors etc totalling £1.2m despite having zilch in the bank. It may be that the only asset the company currently has is a £1.2m overdrawn directors loan account! It can declare a dividend from reserves which the shareholders/directors then use to clear this loan. Nothing unusual about that.

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Replying to Yossarian:
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By I'msorryIhaven'taclue
11th Dec 2023 09:15

DR Reserves £1.2m
CR DLAs £1.2m

OP, whether you call those funds retained profits or reserves, the point is that they are distributable funds (which are being distributed to your shareholders as divs). Always assuming, of course, that those reserves are distributable... certain reserves, such as a eg a revaluation reserve, aren't distributable. What's the narrative on your reserves... "profit and loss account" or something else?

As for: "I am Office Manager and responsible for accounts team and are very worried. Directors have also been hiding a lot of money they take monthly from company bank account and not declare as Directors loans." then although it might look like a free-for-all it's just directors helping themselves to cash and it's up to you and your accounts team to record these sums as debits to the respective directors' loan accounts.

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By Tax Dragon
10th Dec 2023 23:47

Another word for 'spending' is 'buying'.

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By Cylhia66
11th Dec 2023 05:32

Sounds to me you are slightly out of your depth and the figures announced are not insignificant. You ought to get this right really if you want to avoid serious problems further down the line.

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By Duggimon
11th Dec 2023 09:54

The profit and loss reserve is not money that's specially reserved, it's the total undistributed profits of the business since inception. It doesn't have to, and never actually does, match the amount of cash the business has.

One typical use for the profit and loss reserve is to pay out dividends to shareholders, who may also be directors, which as an accounting adjustment has the effect of reducing the profit and loss reserve and settling these directors' loans, much as you describe.

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Melchett
By thestudyman
11th Dec 2023 10:56

I also do not understand the question.

If it’s relating to payments made to the directors then you need to review the booking of those payments. It would usually be classed as one of 3 types of payments:

1) Salary/reimbursement of expenses. Should be quite clear cut if it’s a recurring amount and if other employees are paid at the same time, and they have an employment contract (I.e. not just an office holder). Reimbursement of expenses should have some sort of approval from their manager or however the approval has been setup in the company.

2) Dividend payments. Should be evidenced by board meeting minutes detailing a dividend payment has been issued.

3) If there is inclusive evidence the payment does not relate to the above points - book to the Directors Loan Account. This option is called (by myself) the break glass option because you do not have anything concrete to support the payments are made related to Salary/expenses or dividends.

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