Overheads and Shareholder profits


I wonder if you can advise me please.

We are a consultancy business and therefore consultants get paid via a payment received from a particular project/client.

From that Invoice payment it is broken down as follows
employee receives 40% broken up into basic / travel allowance / housing allowance / holiday pay
30% goes to cover overheads such as visa / healthcare / gratuity / insurance - currently I do this via capital account and break each one down individually which takes time.
30% goes to shareholder accrual which is saved and shared amongst the shareholders at end of year - again this is done via capital accounts.

My question is - is this the best way for it to be done ? very new to this :slight_smile:

Firstly, are we talking about a partnership or a corporation with issued shares ?
Does the consultancy P&L Income receive 100% of the Sales Invoices ?
What method are you currently using to process the 40/30/30 ?

Can you post a screenshot of the Settings - Chart of Accounts, so your existing structure can be seen.
Don’t post Summary tab, as the figures don’t need to be seen.

Normally, employees would not be compensated through capital accounts. Those are for owners, such as in a partnership. I am curious why you are not setting up your consultants as employees and using payslips. The 40% sounds like regular compensation, even if it is broken down for various items. The first 30% sounds like deductions. The final 30% is leftover profit for the company, to be distributed according to your form of organization (possibly capital accounts, possibly dividends).

Your mention of travel and housing allowances also makes me wonder what those amounts are really covering. Is the employee paid a fixed amount? If so, this is regular compensation. Or is this reimbursement for company expenses paid by the employee? If the latter, this should be covered through expense claims.

I can’t see where they are implying that employees are being “compensated through capital accounts”

@Vanguard - looking forward to your response as the required processes can be straight forward.

I may have misinterpreted @vanguard’s comment, “…currently I do this via capital account” as applying to both the 40% and first 30% shares. It was a little difficult to tell without punctuation. If my interpretation was wrong, perhaps payslips are already being used.

Sorry for confusion the partners/ shareholders are also employees and paid as normal.through payslips- it is only the overhead deductions and shareholders profit accrual that I am compiling Within the capital accounts.

Screenshot of my capital account attached.
This just seems a really long-winded way or allocating funds into specific accruals - is there a better / quicker way of collating these sums ?

@Vanguard you need to be more precise as I don’t want to be second guessing your situation.

Which are they Partners or Shareholders - they can’t be both

What are your reasons for doing it this way rather then posting the overheads to the P&L ?

What “funds” are being allocated to specific accruals ?

Normally for businesses, all expenses are posted to the P&L and then:
For a Partnership, only the share of profits is distributed via the capital accounts.
For Shareholders, a dividend is paid out of the profits via a dividend account, not the capital accounts.

Can you please post a screenshot of your Setting - Chart of Accounts ?
(Note - not the Summary tab, as figures don’t need to be seen)

As @Brucanna pointed, this question has a lot to understand. I think maybe you should start explaining if this is a corporation or it is just a group of people sharing a percentage individually for every client, because if it is a corporation, in theory everything is the Corporation’s income. Expenses, or overhead, should not be reported in capital accounts but instead, you should record it as expenses. If this was my case, I would do it as follows:

  1. Create Tracking Codes for every partner.
  2. Record all Invoices as income.
  3. Create Journal Entries to divide the income for every partner.
  4. Record all expenses for the correct partner and create a Tracking Code called “Overhead” so you can divide the “overhead” between every partner.
  5. See the Profit or Loss in the end and allocate it to each partner.

I don’t know if this is the case, but maybe it can help.

@sulfuror - good points. Usage of Tracking Codes via the P&L could certainly be a better option then Capital Accounts assuming normalised accounting, but if there are special arrangements / agreements in place then we need to understand these and then see if they fit.