Trying to figure out how to record and pay expenses. For example, I am using the simplified home office expense, which for me will be £26 a month. I’ve made a new purchase, (titling the supplier ‘expense: working from home’) but when it comes to actually paying the purchase I’m confused.
From what I’d read, I thought I paid it to the Proprietor Drawings Account, but that seems to be something I pay from, rather than to?
Can anyone explain to me in simple terms how I should be doing this?
That is correct - no money actually changes hands when you “pay” the home office expense from your proprietor drawings account, but it will reduce your taxable profit for the year, thus reducing the amount of income tax you’ll need to pay.
If you do actually want to take the money for this “expense” out of the business then you can but it won’t make any difference to your tax position as transfers between you and your business don’t affect the P&L. I would record the expense as paid from the drawings account, then tag any money you took out as a transfer from current account to drawings.
Sorry if I’m being really stupid, I’m new to this and don’t fully understand the proprietor drawings account. I thought from reading I’d done on the forums that the PDA is what I would pay my expenses in to rather than pay them from? Is that wrong?
The PDA is a virtual account - it doesn’t necessarily reflect any real life bank account. Things can be paid of out it if you (for example) paid for business items using your personal debit/credit card. In a similar way, when you take money out of the business, you can pay it into the PDA.
Transferring money from one to the other, as @ian_roberts explains, doesn’t affect your P&L because there is no legal separation from the business and the sole trader. The reason you create a purchase invoice is so that it decreases the amount of profit recorded in the business, therefore reducing the amount of tax you pay.
The reason you tag it from the proprietors account for payment is because no money is changing hands (technically)
Thank you, I think I’ve done it! 