Hello
I am wanting to enter, I think as a Long term liability, a loan I have made to the business as an opening balance for 1st Jan 2019. I thought I should enter in Chart of accounts as an Asset and Liability and then make a Journal entry. I do not know if this is correct but if it is I can not work out where the second line of the journal should go
Thanks Matthew
it was from me and I would like to log it as an opening balance and then as I pay it off or loan more I would like to be able to monitor it and log the amounts.
I just couldnt work out what to call it and where to log it?
If you’re a sole trader or partnership, the loan would just be recorded on the Proprietors Drawings Account or Partners Drawings Account in the form of a “money out” transaction, tagged as a transfer to the current account (to illustrate the money being lent to the business).
Your repayments would be tagged going the other way - as money out of the current account to the drawings account, reducing the “overdrawn” balance.
The same concept would apply with a limited company, but with the Director’s Loan Account
You could, if you prefer, create a new bank account completely, if you wanted to track this separately from other funds that the business owes you.
Thanks Matthew
I think I did that - we are a Partnership
I tagged it as a transaction from drawing s to current account but then only thing is it shows as money in the account when it shouldn’t as is a long term amount that I am owed.
Perhaps setting up a bank account called Directors Loan would work with the opening balance as what is owed? I think that may have been you last suggestion
Don’t call it “director’s loan” if you’re a partnership, that’s a specific term related to limited companies.
As a partnership there’s no legal separation between you and the business, so there’s no “liability” as such (you can’t owe money to yourself). Rather, if you’ve used your own funds to provide cash or pay startup costs (like purchasing equipment) then this counts as capital you have introduced to the business.
What my accountant advised for my partnership was to create a set of new nominals under the capital and reserves section for each individual partner to track their capital introduced, drawings taken, and share of the business profits, as well as one drawings “bank account” per partner. If a partner provides a cash lump sum to the business then that would be money in to the current account tagged (via “something not on the list”) to their capital introduced account. If a partner makes a big purchase for the business then the easiest way to handle that is to process the purchase in the normal way, mark it as paid from that partner’s drawings bank account, then balance that with a “money in” tagged to their capital introduced account.
At the end of the year I sweep any remaining balance on each partner’s drawings bank account into their “drawings taken” capital account, and in the year end journal I split the retained profit between the partners’ profit share accounts, so that each partner’s capital introduced plus profit share minus drawings taken gives their capital “share” in the partnership at any given time.
great thanks yes that makes sense and sounds like exactly how I should do this
So I have created a capital introduced account under Capital and Reserves (3000 - 3999) and I can also see there is (3100) Proprietor or Partner Drawings which I think is what I would use
What I am a little unsure is how to make a an opening balance as it is money that is owed (which I know it can;t be) but I do need to log it somehow and cant actually put as a purchase as is an amount built up over time
Sorry I don’t find this easy to do or understand or dont have the knowledge, but keen to learn
I think you have explained it really but I dont quite follow
You could use the standard 3100 and bundle all the partners’ drawings up together, but I was advised to have a separate account for each partner so you can more easily see each person’s share.
So what are you actually trying to record? Again, there is no legal separation between the partners and the business so there’s nothing to record until the point where you have actually introduced the capital (either by putting cash into the business bank account or by making purchases for the business with your own money).
If you’re buying lots of little things for the business over the course of the year then simplest would just be to record those purchases as paid from your drawings bank account, and if this account still appears to be “overdrawn” at the end of the year then enter a manual transaction (with the “input new transaction” button on the bank account) to return the balance to zero and tag that via “something not on the list” to your capital introduced nominal.
Hi Matthew
I did see that I could click this option Allow this code to be used in purchase invoices for the Capital Introduced which then meant that I could create a purchase that went on the Partner A drawings but this wasnt in the Cpaital and Reserves section
I am a sole trader (same legal entity situation as you and the partnership) and I have always done it as per the method @QFMathew posted above. Any money I physically put in or remove from the business is simply a transfer to/from the Proprietor Drawings Account. Any purchases I make from my own pocket for the business are just tagged as paid from the Proprietor Drawings Account. It is recorded as it is a transaction between the 2 bank accounts but the business doesn’t “owe” me the money or vice versa.
Yes many thanks I think I have got it now , much appreciated
The only thing is I cant log it the partner drawings in the Capital and reserves part but only the Current Liabilities under Partner drawings so it doesn’t seem to quite match
All “bank account” nominals appear as assets or liabilities, to get the drawings to appear under the capital section you need to create a separate nominal in the capital range and then move the balance from the bank account to the capital account by creating a “money out” transaction on the bank account and tagging it as “something not on the list” to the capital account. Typically you’d use the bank account during the course of the year and just clear the balance into the capital section as part of your year-end tidying up process.
I think everyone’s missing the point here. If the loan was introduced prior to the current accounting period, effectively to be brought forward as an opening balance for your current year, yes, the credit bis to the loan account but the debit should be to whatever use the loan was put. If it was simly “cash flow” so paid into the bank, the receipt in the bank account at the time credited would have been the debit entry, credited to the partner’s loan account, the latter treated as a current liability, long term liability or fixed partnership capital (separate to the operating capital account debited with drawings and credited with profit share and any otrhetther sums introduced.
Rather than making a simple jouyrnal entry it would be better to create the full trial balance, or balance sheet and enter all amounts as opening balances.