I just want to discuss a practical example with you people. I prepare the financial statements for UK clients, and most of them are sole proprietors. They normally use bank accounts for their personal purposes which they should not. Which amount of money they used for their personal purposes, it should be reported as a director loan account according to accounting rules, but I just don’t want to show it as DVLA in the balance sheet because they will have to pay a penalty after a certain period of time if they don’t return back the money into business bank account. Can you suggest the treatment of that money what kind of head should I use, and don’t need to create the DVLA head, and I can justify that amount if in future an inquiry opens up.
They normally use bank accounts for their personal purposes which they should not.
If they’re a sole trader, it can just be tagged as a transfer and treated as drawings. If it is genuinely paying for something personal out of the business account, they may need to abide by the DLA rules.
This type of query is one I would tend to ask an accountant can clarify as they would give professional tailored advice. (as the support team are not registered accountants.)
If you are preparing accounts for sole traders, there are no directors and hence no directors’ loans. There is also no tax implication to them taking money out of the business - the money is all theirs in the first place.
Using a business bank account for personal expenses is not ideal as it gets messy, but is not the issue for sole traders that it is for limited companies. Any personal expenses should just be allocated to “proprietor’s drawings” which shows in the capital & reserves section of the balance sheet. There is no tax implication, as sole proprietors pay tax on the profits of the business.
If, on the other hand, you are talking about sole director/shareholder limited companies, then that is different. Any company money used for personal purposes should ALWAYS be allocated to the directors’ loan accounts. If they have put money into the business initially, then this is just repayment of a loan. If they have not, and the funds are not to reimburse for legitimate company expenses, but are in fact non-business, then this is money that is owed back to the company. If the loan shows a debit (overdrawn) balance, then the director needs to repay the money. If it’s not repaid within 9 months of the financial year-end, then there is a charge to corporation tax on the company. This can be relieved once the money is reimbursed. There is absolutely no other option for dealing with personal expenses paid out of the company account.