I am a bookkeeper thats works at home and have recently got a small limited company. To be honest the bloke who owns it is lovely but not at all accounts minded. I am stuck on a couple of things which I bet to you all will be easily sorted. When he took over the company transactions were still going through the previous iwners bank acocunt hence they owe him money. How do I account for this. Also when he took over the company he took over a existing loan - how do I acocunt for this as the cash was never actualyy recieved by him?
I'm sure this all can be easily answered - just not by me!!!
The best way I've found to account for payments made by any means other than the bank, cash or credit card is to set up a new bank account named the new means of payment. You could set up a bank account called "Joe Blogg's bank account" and make your payments from there. Then at the end of each month journal the bank balance to a creditor's account called "Joe Blogg's loan account" where it sits as a liability to be paid at a future date with the detail noted as 'Payments made by Joe Bloggs transferred to liability'.
When you state your client took over an existing loan account, somehow the balance of the loan must appear on the balance sheet as a creditor to start with. There will be a journal of the purchase of the business placing all assets and liabilities into the company. Make sure you have your correct opening balances from the accountant. Then the repayments he makes must go against this loan. If at all unsure, place the repayments into the loan account making this a debit balance and let the accountant deal with the opening balances.
I think that we just have to cover basic concepts here a bit first.
the big difference between a limited company and a sole trader is that it is the companies income and expenditure rather than your clients. This is an important concept.
The money that has gone into the previous owners bank account belongs to the company and must be recorded as a debtor until received. The fact that the client has paid the money to the previous owner now makes the previous owner the client (and debtor).
If it unlikely that the previous owner will pay across any sums that they receive then a provision for bad and doubtful debts would need to be created.
Currently it's too early to suggest that the debt is doubtful so just leave it in debtors for now.
From the perspective of the loan, this comes back to the concept that the company is a separate legal entity. It was the company that took out the loan and it is the company that must repay the loan.
Your client as the new legal owner of the shareholding of the company is legally responsible for ensuring that the company pays it's debts which will include this loan. However, you have to get your mind away from the concept that your client has a loan or your client is owed money.
It is the company that has the loan, it is the company that is owed the money. Your client has a fiduciary duty of care for the company similar to that which one has for a child but there is seperation between the legal rights of the company and himself.
This is known as the veil of incorporation and provided that your client does nothing to lift the veil such as treating the companies money as though it were his own then assets such as his house (being totally separate to the assets of the company unless used as security for the company) are protected in the event of a wind up situation.
The loan should have been factored into the purchase price when buying the shareholding of the company. If it was not then I assume that your client purchased the company without proper advice from a qualified accountant which even in the simplest purchases of limited companies is never a good idea.
Hope that this helps rather than just confuses matters further,
All the best,
Shaun.
P.S. just amended the post as said "paid into the previous owbers account" rather than "paid into the previous owners bank account". I know what I meant but could be confusing to the reader.
-- Edited by Shamus on Sunday 23rd of May 2010 10:25:29 AM
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
