On the Chart of Nominal Accounts, when you click [?] on 1202 it says “tracks sole trader drawings”, and on 3100 it says “drawings by the owner or individual partners of the business”. Am I right in thinking then, that code 3100 would be for Ltd companies and would not be relevant to sole traders?
Any amounts paid by a business to its proprietor are treated in the books as withdrawals of profit and not as expenses incurred by the business. Sole trader NI contributions are not an allowable expense and so must be deducted from profit. Profits are capital as long as they are retained in the business. When they are paid out, the business suffers a reduction in capital. That is why I believe it is correct to tag such outgoings to 3100 (which sits in the capital and reserves part of the balance sheet). If, say you pay £35 in NI contributions, the effects are:
- Capital is decreased by £35 ====> Debit entry on account 3100
- Cash or bank is decreased by £35 ====> Credit entry on cash or bank
Is that the same for drawings then?
Drawings are treated in this way, so yes.
So what is the point of 1202 then which “tracks sole trader drawings”, why is it even there if we should be using 3100 for drawings? Not only that, but when you tag something as drawings, 3100 isn’t even there.
Anyhow, I’ve journalled the money showing in 1202 over to 3100, and that leaves a balance of 0 in 1202 and that money is now showing as a debit in 3100, under capital and reserves, is that right?
Taking my eg in an earlier thread concerning a £35 payment to hmrc for Ni contributions:
Method A (using nominal 1202)
Bank balance is reduced and 1202 is increased so NO difference to total for net current assets (current liabilities less current assets).
Method B (using nominal 3100)
Bank balance is reduced and 3100 is also reduced. Remember NI contributions are non-allowable so are ‘drawn’ from profits/capital. The overall effect here is net current assets reduce by £35 and capital and reserves by same amount.
I believe method B is how accountants would have it and I have asked this of several professionals in the field and been guided this way. If anyone out there disagrees strongly, then by all means put your case forward. Reminder - I am a sole trader, not a ltd company.
Cheers, it’s starting to make sense to me now about putting drawings into 3100 (the NI bit I knew it was not allowable as a business expense, I pay that from personal money in my pocket anyway).
If I want to claim simplified ‘use of home’ expenses, which would be £26 a month, what I would need to do is make a purchase each month, and I saw someone say that to do this and account for it you would ‘pay’ this out of your Proprietor Drawings Account.
However, if I’m not tagging drawings to 1202, or if I’m jounalling drawings from 1202 to 3100, the balance in 1202 will always be 0, so how would I pay those expenses? Could it be done from 3100?
Good question, you have all the same questions I have.
If you pay expenses out of your personal bank account rather than the business account, you would just raise the purchase invoice as per normal, and tag as a payment out of the proprietors account. Think of this as your own bank account, but only tracking things in relation to your business.
As @Joe once pointed out:
The ‘Proprietor Drawings Account’ (1202) is a Balance Sheet account used to track both drawings and capital introduced, is does not have an effect sales/income and therefore trading profits. Think of the Proprietor Drawing Account as a virtual bank account. i.e. transfers will reflect movements between the business/you personally and vice versa.
If your Accountant or you produce a balance sheet, capital introduced and/or drawings can be tracked from the Proprietor Drawings Account, when preparing the balance sheet it’s good practice to journal the balance from 1202 to 3100 (Proprietor or Partner Drawings), hence the 3100 nominal code.
So yes @Paulwk1972, paying the £26 from your drawings account is correct. At the end of the year, you just journal the actual drawings balance (e.g. what ever is in the 1202 account) from 1202 to 3100.
Hi thanks for that.
That makes complete sense.
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There is a recently revised article on this topic http://help.quickfile.co.uk/main/1/business_mileage.htm
I am using this for claiming business miles where I have purchased fuel etc out of personal funds. I have used the flat rate method of 45p/mile. I created a supplier entitled Expenses: Approved mileage, then logged a new purchase order under this supplier and ticked it as fully paid, stating that funds are taken from Proprietors Drawings Account (1202). The nominal code to use is 7400 (travelling). Then I go into 1202 and raise a journal to Dr 1202 and Cr 3100 (proprietor or partner drawings). The net effect is to show the amount in the expenses section of the P&L account, thus reducing the taxable profit for tax purposes. In reality, no money has physically left the business.
What about a VAT payment from my business current account to HMRC. What do I tag that as, because I see in the drop down menu it has payments to HMRC (VAT, PAYE and so on?)
You are probably correct in what you are thinking but as I am not registered for VAT, could not be 100% certain. Maybe the chap at Faraday Keynes can comment/advise?
Any vat payments made to HMRC would end up in 2202 VAT Liability
I have done that for the VAT payment, but now it shown up on the balance sheet as an asset, which shown as profit on the P&L sheet. When it is not tagged it shows in my suspense section as a negative, but once tagged the sum disappears from the suspense section and the profit then jumps up by the tagged amount. Surely this is not right? Am I doing something wrong?
Do I have to journal this away or something?