DESKTOP EDITION CLOUD EDITION SERVER EDITION GUIDES FORUM

Directors Loan Account as Asset/Liability or Bank Account


#1

How do other people use the Directors Loan Account - assuming that you are using a limited company?

My accountant said that it can be either a Liability or Asset and it will either be positive or negative depending on whether its an asset or liability and whether its in credit or debit. That part I understand completely.

She had however mentioned the option of setting up the Directors Loan Account as a bank account so I could use this account to spend and receive money.

If I took two scenarios that I will be using this year. I will be paying X amount in Salary to myself, so this will be bank spend and allocate to Salary. But I will also be borrowing from the Directors Loan Account and paying myself Y amount each month. At the end of the year when I declare Dividends then I will first pay off the Directors Loan Account and pay the balance in Dividends and Use of Home and Business Mileage Allowance (which will be allocated to the Directors Loan Account Monthly).

So I could setup Directors Loan as a bank account and do the following:

Current Bank Account transfer to Directors Loan Account and each month directors loan bank spend on Directors Loan Account and allocate Business Mileage and also lend money each month to director and at end of year Directors Loan Bank Receive and allocate to Dividends Account.

This would mean that I don’t have to use Journal Entries to transfer between Business Mileage, Dividends, Use of Home Accounts and the Directors Loan Account.

Or would you recommend that we go with the traditional approach (which we have done) and make Directors Loan Account an Asset/Liability and just do journal entries between DLA and Dividends etc.

I guess it boils down to which method would give more useful reporting information over time?


#2

Having the Directors Loan as a Bank account on the surface sounds rather ugly even for some of my own unconventional approaches. Bank Accounts are external of the company, places where you hold cash. Even Cash accounts (petty cash tin) are places where you hold money. Your Directors Loan will never hold money, it will only ever “hold” the balance between the various cash and non cash transactions (transfer from Prov for Div)… Bank accounts can never have non cash transactions.

Even a Bank Loan/mortgage (payable by a schedule of payments) isn’t classified as a Bank account.
Based on your summary above, Liabilities would be the logical home but that doesn’t prevent you from re-locating it to Assets if the status of the balance warrants it.

No you wont, you will be borrowing the money from the bank account and recording the contra of that payment/transaction in the Directors Loan account.

Bank Transfers are a Cash Journal. Sales Invoices are Sales Journal entries. Purchase Invoices are Purchase Journal entries. In fact, every accounting transaction is a Journal entry of some type.


#3

Yes you are correct. Every accounting transaction is a journal entry! What I mean is instead of using the Journal Entries tab in Manager, I could simplifiy that accounting process by using bank spend, bank receive and bank transfer.

I understand where you are coming from. Technically you are correct. The DLA is not really a bank account. However I was just wondering it would be a simpler approach my accounting needs. The basic issue is that I will be paying salary every month, but on top of that, I will be “borrowing” money from the company every month (which I will have to do a Journal entry) and each month I will pay recording Business Mileage which my accountant advised me to pay into the Directors Loan Account so I am always paying my personal accounts the same amount of money in month and it makes it so much easier to budget for personal accounts.

The biggest issue I have with Journal Entries is that I can never remember whether I am debiting or crediting the account! As you mentioned in the other topic, perhaps recurring journal entries might be the ticket here!


#4

Therefore don’t create it as one, that would be your first simplification.

By the amount of pondering/questioning, I would suggest not, :slight_smile:

Now I am the confused one. If you are borrowing actual money then Journals aren’t involved. If you are just recording reimbursable expenditure then its not borrowings. Further confused by “I will pay recording Business Mileage” ???

While Manager doesn’t have recurring Journals it does have Clone under “view”, so I would suggest that you develop a Master Journal, that may only require changing values, If you want some assistance either here or via message its available.

With regards to Debits and Credits just draw up a reference cheat sheet of the alternatives.


#5

Admittedly, this always requires some thinking, especially once you get used to all the shortcuts (automated allocations and decisions) in accounting software. In the days of manual books, the process was reinforced with every transaction, as you had to first enter both debits and credits into the journal line by line and then transfer them to appropriate account ledgers.

One option, once you have your chart of accounts set up is to build yourself a simple table. List all your accounts and and place X’s under two columns: “To Increase” and “To Decrease.” Further divide each column into two halves: “Debit” and “Credit.” Base the table on the accounting equation:

Assets = Liabilities + Equity

Go back to the Latin meaning of debit and credit, as left and right. Asset accounts, being on the left increase with debits. Liability and Equity accounts, being on the right, increase with credits. And, of course, vice versa.

So, for example, a bank account, being an asset account and on the left, would increase when debited and decrease when credited. Since in double-entry accounting debits and credits must match, by derivation, expense accounts are increased by debits to offset the credits that reduce assets. And income accounts are increased by credits to offset the debits that increase assets.

Conversely, accounts payable, being a liability account and on the right, would increase when credited and decrease when debited. Again, by derivation, income accounts are increased by credits to offset the debits that decreased the liability. And finally, expense accounts are increased by debits that balance the credits of increased debt to a supplier.

So whether you come at things from the asset or liability side, the left or right, income accounts hopefully go steadily up from credits and expenses increase from debits.

While that might make your head hurt to figure out initially, you only have to do it once. Then consult your handy table. And, of course, once you figure out half of a journal entry, the other half is obvious.


#6

Its probably because I am not explaining what I am trying to do very well as I don’t really understand the concepts as well as I would like.

I have been thinking about it, and decided that I don’t really like the idea of using the DLA as a bank account. I have stuck it in assets.

As for the borrowing aspect, I will a simple example.

I need £100 to live on each month to pay my mortgage and food etc.
I can only pay myself a salary of say £50 a month (for tax efficiency reasons)
I might get £20 this month for Business Mileage Allownace and maybe £25 next month.

My accountant suggested that instead of having paying £20 this month for Business Mileage and £50 salary and then borrowing money from the Directors Loan Account to the amount of £30 for this month and then the next month paying £50 salary, £25 Business Mileage and then £25 from the Directors Loan Account - she said it would simpler to pay £50 every month for salary and allocate £50 every month to the DLA which I have paid to myself. Then I would allocate whatever I need for business mileage to that account and decrease the loan against the DLA every month!

So to pay the salary, I do bank spend and salary to the tune of £50 every month.
To pay myself the remaining £50, I would do bank spend and allocate to DLA account (so yes you are correct, no Journal entry here - now that I have though about it)
But to pay allocate Business Mileage to the Business Mileage Expense Account and to decrease the DLA account - this would be a journal entry unless I have misunderstood something?


#7

I agree with you and @Brucanna, I need to create a simple reference sheet for debiting and crediting accounts, because I am always making mistakes in this area - expense accounts are easy - they are debits, but I get muddled up with more complex accounts like the DLA


#8

You have a option that doesn’t require a separate Journal. With the Salary and monthly top up, that can be one transaction: Spend Money 100, line entries Salary 50 and DLA 50.

Not knowing your exact timings so I am going to make these assumptions. The April Business Mileage is not known until May 1. You pay the May Salary/monthly top up in the first week of May, Therefore in a single transaction you could Spend Money 100 with the following line entries:
Salary 50, DLA 50, BM Exp 25, DLA -25 (note the minus) so the 25’s cancel themselves out.

In effect you have detailed the Journal within the Spend Money - hope that hasn’t confused you.
All you have to do each month is clone that payment and make any value changes required.


#9

I might end up doing quarterly or bi-annual transactions for business mileage. I have been doing it monthly in order to bump up my personal income, but the approach that my accoutant suggested is better for me so that I can have a set sum come in every month. So there is no longer a need to do monthly petrol mileage. It is an interesting use of spend money to handle the business mileage into DLA account. Hadn’t thought of that.


#10

@dalacor, be careful with the mileage. If you are actually spending money (such as on petrol) and reimbursing yourself, I think all the various musings above make sense. But if you are just claiming a standard mileage allowance for tax purposes, that is different, because no money changes hands. In that case, an expense claim for the mileage makes more sense. Then, to clear the expense claim, you can go back to all the options discussed having to do with DLA, etc. A sole trader would simply clear the liability to owner’s equity. That is why some corporate entities prefer to reimburse their shareholders who are also employees in actual cash. Food for thought; there are many approaches.


#11

You can use Capital Accounts tab to set up yourself on it. Just make sure to go to Chart of Accounts and rename Capital accounts to Directors loan account and categorize it under Assets or Liabilities.

When you pay yourself from bank account, allocate funds to Directors Loan Account -> Drawings. When you pay for something out of your pocket on behalf of the business, use Expense claims module.

You see? There is no use for journal entries other than declaring dividends once a year.


#12

I am going to get lost with all these roads! Which road do I take! :grinning:


Capital Subaccounts & Share capital
#13

He running a corporation, the Capital Account (tab) is the Issued Shares = Paid Up Capital. That can’t be allocated out of Equity. You generally don’t have Drawing in a corporation.

One Paid up Capital account, one Directors Loan account, it can’t get any simpler then that.

And how do you get the Expense Claim account balance to the Directors Loan account - by a JOURNAL


#14

If you are using capital accounts, you don’t have to balance anything.

If you create general ledger account Directors Loan account, then you will need to use journal entry to contra expense claims.

I know Capital accounts tab wasn’t made for corporations but it can bend to be used for that purpose. Probably not a great idea as in future I might introduce new tab called Loans which will be better place to setup director loan accounts. As technically, it is really a loan… not a capital account.


#15

I think that I will stick to using the DLA in Assets because as you say Capital Accounts is not meant for Corporations which means that I will be using non standard accounting practices. I would prefer to do things correctly, so that its consistent and easy to understand whats going on for any accountant. Journal Entries are not really that much of a problem and I will only need to do it for Petrol Mileage say every quarter. I could do as @brucanna suggested and include the mileage in the bank spend for DLA Loan and Salary, but I think a journal entry would be cleaner in this instance as no actual money changes hands for Petrol to DLA transactions. cheers


#16

I have a number of transactions that have appeared in the suspense account when doing a bank reconciliation.

I set up an Equity account called Owner’s Loan Account that I used whenever I loaned personal money to the company. However, there seems to have been a few changes recently and these transactions are now sitting in the suspense account. I reconciled these in April but now there are 3 transactions, previously reconciled in 2015 that now appear in the suspense account.

One is an amount of money I took out to pay in China via Western Union, but the job was postponed, so I returned the money into the company. I am not too sure how to place this back into the company so I placed it into the Owners Loan Account (Equity Account) but I know this is not right and need to know the best way to record this. It is sitting in a suspense account but it says it has been reconciled in the bank account so not too sure what I have done.

The next is a small payment I made for delivery of goods, but the order was canceled, and the money I paid for the delivery was returned. I presume this can be done through a journal entry, but not too sure if delivery payment expense, and delivery payment income is the right thing.

The other is a loan paid by my wife from personal finances. It was paid to the company to help pay off a job. It was supposed to go into the business bank account but she clicked and sent, by mistake, it to an old business account which is closed, and somehow the money arrived into our newly opened credit card account we use at the same bank - the bank cannot explain how this happened and could not do anything to reverse it, so we kept it in the CC account to reduce the credit card monthly amount. That said, I don’t know how to record this in the system and would appreciate your help.

For all of these I tried to create a journal entry, but this does not seem to remove the money sitting in the suspense account. It would be good to know what to do with these 3 transactions. I am not an accountant, so not too sure of the lingo to use and hopefully the above will make sense.

Thanks in advance.


#17

Firstly, you can not use Journals for cash transactions - you can only use Receive/Spend Money.
Secondly, The Owner’s Loan Account, if it is intended to be repaid funds should be a BS Liability account.

With regards to the transactions sitting in the Suspense account, this indicates they are missing some key data and that data needs to be fixed to correct the entry, eg remove it from Suspense. Transferring it out via Journal is a no no.

I am assuming that you have done a recent Manager update and that this has caused these transactions to suddenly occur in Suspense, this is because Manager now makes some fields compulsory which they weren’t before - such as Customer & Supplier names on Sales/Purchase Invoices

  1. Western Union - when taking this money out you would have done a Spend Money with an Account allocation, possibly an expense account, On returning the funds you would do a Receive Money and use the same Account allocation as for the Spend Money

  2. Delivery Payment - as for (1) above, just do a Receive Money to reverse the Spend Money

  3. Credit Card - is it a personal or business credit card ? If personal then do nothing as its not part of the business. If business then Cash Account = Credit Card, then Receive Money and the Account allocation would be Owners Equity (Capital) if the funds are being left in the business.

I am also assuming for (3) that you are a sole trader, if you are a partnership or a company please advise and I will update this advise.

Posting screenshots of the Suspense account transactions (edit not view mode) would assist if you require further assistance.


#18

Lubos, I cannot see how to offset a shareholders expense claim to the Capital account?


#19

If the shareholders have capital accounts, they will appear in a separate category when selecting the expense claim payer. The offset occurs automatically. If they don’t have capital accounts, you will need to create them as expense claims payers. Then, assuming you will reimburse them, just post the payment to the Expense claims account. All is explained in the Guide: https://www.manager.io/guides/6898.


#20

If by shareholders you mean a corporation (Limited) with issued share capital then expense claims “shouldn’t” be going anywhere near a capital account.