I know I have been doing this for years but was reading some posts and thought I would do it another way.
So it is a company with 1 shareholder who draws money out through the year so come the end of year I want to declare it as shareholders salary.($2000)
I have set up an account shareholders current account under BS liabilities
and have the current accounts in the equity section
So I did a pay slip and put it to the P&L expense account shareholders salary(Debit)
then I made payment from the bank account to the employee clearing account.
(which I like cause it took it out of the bank account and put in expense account)
now I am not sure what to do to record the salary on the balance sheet I know I use journals
but what is the credit and debit are we using the BS account and the capital account in the equity section. I thought the whole point was to not use capital accounts in equity section instead just use the BS one or am I missing why we are using a payslip
So my balance sheet looks like this now but it does not look right
Normally it’s a private withdrawal and not salary. So just create a bank payment and debit Retained earnings.
A shareholders loan account should not be assigned to the Equity section of the balance sheet. It is an asset if it is a debit balance or a liability if it is a credit balance. You should obtain advice on the deeming of dividends on shareholder loans.
Use payslips only if you are an employee of your company and receive a wage or salary.
I dont usually do it this way I was reading a post about someone doing it that way and I thought I would do it in my trail company and see how it works.To me it did not look right so I carried on doing it the way I have done it for quite some time
Firstly a shareholder and an employee are two different legal identities even if they are the same person. A shareholder receives a dividend, an employee receives a salary.
Assuming that you are paying the salary, then do a payslip and then a payment which clears the Employee Clearing account. There is no need for Journals or any need to record on the balance sheet.
However, if you are not paying out the salary, then do a payslip and then a Journal to transfer the balance from the Employee Clearing account to the shareholders current account.
There are NO entries into any capital or equity account.
When you have a company with shareholders, there is no such thing as a “private withdrawal”.
Any transactions with a shareholder MUST go through a Asset or Liability Current Account, not Equity.
Agree with this Journal, just to add @Wornout just make sure you do take the tax implication of declaring a salary into consideration.