Advice Needed: Director's Loan vs Share Capital

Hi everyone,

I have a small accounting question. I understand that you are not my accountant, I am not going to hold anyone liable, accountable and will not quote anyone’s advice, I just need a point of view from experience to better understand the issue. I have researched the internet, forums, videos but always get vague answers, so I was wondering if anyone could give me some pros and cons on the topic below.

Scenario: a company initially issued 100 ordinary shares at £1, which were fully paid up. Later one of the directors paid another £1000 into company’s bank account for financing all various start up costs. For the initial issue of shares I would debit cash £100 & credit share capital £100. But for the later cash transaction would it be better to recognise credit as a directors loan or issue another 1000 shares at £1 each? If share issue is the correct method would it be better to issue preference or ordinary shares? My main concern about directors loan is that it disturbs the financial reporting, and increases the liabilities of the company while leaves wealth at very low. And I am not sure how it will be perceived by investors and banks.

Thank you in advance! :relaxed:

Your question is very specific and I am not sure if you would get an answer here. I am also a user of the accounting web forum. There are quite a lot of accountants answering all sorts of question. Maybe you want to have a look there:

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I wouldn’t necessarily trust the answers on Accounting Web either to be perfectly honest! You would be better off speaking to an accountant directly.
However, tt sounds to me as though the £1,000 paid in is in effect a “startup” loan and should be recognised in the balance sheet as a director’s loan. They are very common in small companies especially when starting out so shouldn’t prejudice potential investors or banks.
How many shareholders are there? And are the shareholders and directors the same people?

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Hi, thank you for your response, it is appreciated. I will have a conversation with an accountant for sure, just wanted to educate myself a bit more before I do. To answer your question, there are only two shareholders, both of them are directors. The shares are split 93% to 7%.

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