Receipts Paid in Director personal account

Managing unpaid invoices where director has spent the receipts

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Hi All,

A new client of mine has a new Ltd company (10 months), she received payments for invoices into her personal account as the banks were slow to open her business account due to covid. However, she has spent all that money. I have entered the invoices into her ltd company on Xero, as they will be sitting on her customers' books. However, she doesn't have the money to reimburse the ltd company and I'm not sure how to treat the 'unpaid' invoices on her books. She has bought some items that could be construed to be assets but a chunk of it has been frittered away. I am not sure how to bring the assets in and also how to account for the unpaid invoices.

Any ideas would be gratefully received.

Kindest Regards,

Awk

Replies (10)

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By Matrix
25th Aug 2021 07:21

You can tick a box in the Director loan account to enable payments to be made to/from that account. Then you can reconcile the invoices to this account.

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By Awk
25th Aug 2021 08:57

Thank you, I thought there might be a neat way within xero.

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By Truthsayer
25th Aug 2021 08:30

Treat the invoices as 'paid' to the director's loan account, i.e. input journals to CR the sales ledger and DR the DLA. If the director cannot or will not repay the money, offset against it the salary and dividends she is due.

'She has bought some items that could be construed to be assets but a chunk of it has been frittered away'......What are these assets?

Also, I have to ask why you need to ask these questions, as they are simple bookkeeping techniques. If you don't know how to do this, you should not have clients at all. Are you genuinely a practitioner?

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By Awk
25th Aug 2021 08:55

The assets are fixtures and fittings for her house, but that's where she films and does most of her work.

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By wingman22
25th Aug 2021 09:34

Intrigued - what sort of business is this? It sounds like a former client with a basement transformed to provide various services.

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By Awk
26th Aug 2021 10:55

It's an influencer business.

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By Leywood
25th Aug 2021 09:35

So they are not assets of the business.

You really should hand this off to someone who knows what they are doing.

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By Awk
26th Aug 2021 10:58

I appreciate the time you took to respond, I will take on board your suggestion and consider it.

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By DKB-Sheffield
25th Aug 2021 10:23

Hi Awk,

I'm not immediately sure whether your question is primarily that of a "bookkeeping" nature (i.e. what the correct accounting treatment should be), or a "software" nature (how that treatment should be reflected in Xero). The latter follows the former - never the reverse.

As the customer receipt was received into the client's personal account, this needs to be matched by a debit entry to the director's loan account. Any *allowable* expenditure paid from the director's loan account may then be credited. Be aware, if there was a considerable period between commencement of trade, and the opening of the company bank account (I have certainly come across situations where this has continued for many months), it would be advisable to review the personal bank accounts to check no income has been lost (possibly customers who have forgotten to update bank details)!

Regarding the entries on Xero (or any software for that matter), it is important to realise, the software is principally in place to replicate the accounting treatment. It is not 'special', it is a large General Ledger. Whilst it may have many bells and whistles, it is basically no different to day 1 bookkeeping 'T' accounting. It just handles the double entry, maintains the control accounts, and prepares the TB (and countless reports besides). It can be confusing as a more single entry method appears to be used, however that is not what happens in the background (as any review of transaction listings will show).

So, back to the point... think about what "should" happen (maybe jot it down on paper) and then work out "how" to do that in the software. This will pay off in future as you'll be able problem-solve your way through many more complex software queries.

Regarding the non software parts of your post...
- Director's Loan: As has been suggested, the entry in the DLA will need to be repaid! Non payment will lead to s455 and potential BIK. Reducing this by salary may be an option. So may dividends (although, this will depend on post-tax profits)

- Assets: Nothing can be "construed" as a business asset! It either IS a business asset, or it isn't. Fixtures and fittings for the home where the client works must be subject to greater scrutiny. Indeed, unless there is a compelling business need for the purchase (e.g. a special studio lighting rig), I'd be very sceptical.

Finally, I have assumed you are a bookkeeper looking to get a client's accounting records up to date. I am further assuming the final accounts and Corporation Tax will be prepared and filed elsewhere. If this is not the case, and if your questions are indicative of your level of understanding, I'd recommend - as have others - that you pass on the final accounting works until you are more experienced/ qualified.

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Replying to DKB-Sheffield:
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By Awk
26th Aug 2021 11:08

My intention is to have the final accounts and the CT computations looked over before submission, I haven't ever worked with clients at this level, so it's new to me in that sense, as I get more comfortable, I'm sure I will ask less of this forum but nevertheless, I thank you for sharing your thoughts and your expansive advise, it's been genuinely really helpful and greatly appreciated.

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