Recording business expenses

I have a question about recording expenses, as I’m confused between my role as a director and owner! (Limited company). So when recording a business expense, do I use the director’s current account (under liability) or the director’s account (a capital account under equity)? I guess the first accounts as an expense paid from the director’s personal funds, not the company’s. And the later accounts as a contribution to the company’s capital.

In your opinion, what is the right way to record expenses? I think there are 3 options:

  1. use expense claim, with the payer as the director’s current account (liability).
  2. use expense claim, with the payer as the director’s account (capital account, equity).
  3. use the “director’s bank account” as money spent for those expenses.

I think the right way is option 1, but then, the company will be liable to the director and that would need a bank transaction to pay it off. I’m more inclined to go for option 3 and not use the expense claim at all. This bank account is included in the “Cash at Bank” which can be balanced out by a simple transfer: company’s bank account > director’s bank account.

You are correct, option 1 is the right way.

Its complicated and I will admit that I don’t fully understand the options here as well

Option one is technically correct. The company is re-imbursing an expense claim to the director. The fact that you are a directory is actually irrelevant. A staff member could be claiming expenses re-imbursement. So the company would have to do a bank transaction to pay the expense to whovever is claiming the expense.

However I believe that option two is also correct in that this allows you to allocate expense account amount to the directors capital account. So the expense is “paid”, and the directors Capital Account increases and is viewed as money loaned to the business by the director and can be paid out at any time.

I don’t know that a business should have a directors bank account? But then again, my knowledge of this area is a bit murky as its not something that I deal with on a daily basis.

If your object is to not use an expense claim, then possibly option three is the only way to do it, but if your object is not to do a bank transaction, then I think that option two is what you are looking for where you convert the expense claim into a loan from the director by paying it into his capital account?

Thats my understanding of director capital accounts, but someone else with more accounting knowledge can perhaps confirm/clarify.

It may simplify things if on a daily basis you ignore the terms director and owner and see yourself as Manager for day to day purposes, If you have other employees, then whatever accounting processes applies to them also applies to you. Director is a legal requirement for LTD companies.

As for your confusion between Owner & Director let me put this to you:
Owner: Is the person who puts up the capital to start the business - they might only attend the business once a year to pick up the annual accounts and dividend cheque.
Director is the person appointed by the Owner to manage the business on their behalf. If the Director is paid a salary then they become an employee of the business.

To answer your question we need to know when are the expenses going to be reimburised?
If its going to be in the future then your No 1 is correct as that brings to account the expenses now and the payment is a separate future transaction.
If its going to be instant then you could write a cheque on the spot, assuming its for a single purchase, or if its for a multiple of small expenses you could consider creating a Petty Cash Float - then all those sort of transactions are treated within the business without needing expense claims or artificial “Director Bank Accounts”:

  1. Activate the Cash on Hand TAB and then create a Petty Cash Float account.
  2. Cash a cheque at the bank for $X - use the transfer money when processing the cheque
  3. When ever you use those funds, just process the payment via the Petty Cash Float account
  4. When ever the float gets a bit low, Cash another cheque to bring the float back to its $X value.

This would be the correct way to process your No 3

Now your No 2 above - Directors (capital account) - is a big NO NO as you are a LTD company.
In a LTD company it’s Owners Capital not Directors Capital and the Capital account should represent the money put up by the Owner and in return they receive shares. So the only time you would be putting funds to the capital account would be if you were going to be issuing more shares. So the Capital Account should always equal - The number of shares on issue X the value of the issue price (100 x $1 = $100), Hoping this has clarified things for you

This would not work based on the way you have written it. Your company bank account balance would be reduced by the transfer but your actual company account balance at the Bank would remain unchanged.

You would have to write a “please pay cash” cheque, process it as a transfer but also cash it at the bank then all is equal,

Also, such a “bank account” should be opened under Cash on Hand, not Cash at Bank within Manager - as they are cash transactions and unrelated to any actual Bank.account

Very helpful to highlight that there is a difference between owner and director as far as accounting goes. I think that the confusion comes in with the fact that many companies like mine - I am the owner AND the director!

To the OP, what I intend to do next financial year is obtain a business loan and structure my dividends and salary accordingly, so I am not forever juggling money. At the point, I will be speaking to my accountant regarding director loans, capital accounts etc. It might be an idea for your accountant to show you the best options there. This is where an accountant is really worth their weight in gold!

Can I suggest that you try and avoid using the wording “Director Loans”, Director is a job title not a person and titles don’t loan money but people do. What if you had two Directors - would you call them Director 1 and Director 2 Loans. In reality the liability is with a person so the account should have their name used, but if you want to use a non-person account description - then Shareholders Loans would be more accurate

Q. - Why would you get a business loan to cover dividends?

Very good point. When I use the word director loan I am simply referring to the accounting practice of a company lending money to one of the directors. But you are correct that in capital accounts the loan would be made out to a specific director.

No the loan for myself that I was referring to was to more to conver my personal expenses while I am busy expanding the business. So I will be talking to my accountant about which options would be the best - getting a personal loan from a bank or getting a business loan as I am spending a lot of money on advertising and marketing which then isn’t going into my pocket pay my personal bills. So I might want to borrow for the business under the guise of expansion and thus enable the business to pay a sufficient dividend on which I can live on as well as pay for the marketing, advertising and other expenses related to expanding the business. Anyway that is completely off topic!

Business loan so the interest is tax deductible

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Good point. It most likely will be a business loan, but my criteria will be interest rates and amount I can borrow and amount that I actually need etc and what I need it for etc etc!