Time to ask a question as I've looked at this for too long!
I'm looking at some accounts I've been given today. The director has (as they do) been merrily spending out of the bank acc. All expenditure has been stuck in the DLA to be dealt with at a later date (Cr bank Dr DLA). However as liability acc's normally have Cr balances it's made the Balance Sheet not work out as the DLA is showing as a positive in the list of negative liability acc's.
A simple answer I'm sure, but I can't quite see how to correct this so the balance sheet liability totals are correct?
Perhaps it's dinner time.
__________________
Jenny
Responses are my opinion based on the information provided. All information should be thoroughly checked before being relied on.
What software are you using? Assuming it's Sage, you can edit the chart of accounts to allow the DLA to be a "floating account" so it will show as an asset or liability as appropriate.
hth.
__________________
Tony
Responses are intended as outline only. Formal advice should be sort from your Institutes Technical Department or a suitably qualified Accountant.
Yes it does need sorting out. Typical example of someone getting past the year end and then thinking about doing the accounts. Accountant told them that once they had a Ltd Co they could just spend out of it whenever they needed to. Hence there is now a massive DLA.
__________________
Jenny
Responses are my opinion based on the information provided. All information should be thoroughly checked before being relied on.
Doesn't sound as though your client was getting good advice on this one.
If a director uses the company as a personal piggy bank then they risk HMRC disregarding the fact that it is a seperate legal entity.
Maybe the director needs a quick reminder that as a director he is an employee of the company. As an owner his capital and time investment in the entity gives the owner rights to distributions on profit etc. but the company exists as an entity in it's own right so taking money in this way is the same as borrowing it from another person.
Hope that you're having a good day Jenny,
All the best,
Shaun.
__________________
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.
Sounds like some bad accounting advice; however, I have often found that it is the client that doesn't understand how it works, particularly if they are used to being a sole trader! Its easy to blame the accountant.
__________________
Phil Hendy, The Accountancy Mentor
Are you thinking of setting up your own practice or have you set up and need some help?
If so a mentor may be the way forward - feel free to get in touch and see how I can assist you.
The accountant may not be too worried about the overdrawn DLA as they may deal with this on a yearly basis by issuing dividends against the DLA. There may be a plan already in place that has been mentioned to the director but either not fully understood or not passed onto the bookkeeper.
__________________
Forgive the typo's I generally do not proof read. Just lazy I guess!
Agree with comment above, the profit for the company is usually assesed at the year end and a decision to issue dividends or bonus payment to clear the DLA.
True - but wrong. Dividends should not be issued unless the company has made the profit at the time the dividend is issued or, in the case of these errant directors who use their company as a piggy bank, spent!!
It is the case in a few companies that i work with that the dividends are calculated to clear down the directors loan after the year end. This will be fairly common practice and that may be why the accountant is not too worried about a directors loan account.
In my original message i was not advocating issuing dividends without adequate reserves, merely waiting until after the year end when the extent of the overdrawn directors loan account is known. Quite standard procedure with a lot of owner managed companies.
-- Edited by adi2402 on Wednesday 13th of April 2011 08:24:13 PM
__________________
Forgive the typo's I generally do not proof read. Just lazy I guess!
It is the case in a few companies that i work with that the dividends are calculated to clear down the directors loan after the year end. This will be fairly common practice and that may be why the accountant is not too worried about a directors loan account.
In my original message i was not advocating issuing dividends without adequate reserves, merely waiting until after the year end when the extent of the overdrawn directors loan account is known. Quite standard procedure with a lot of owner managed companies.
-- Edited by adi2402 on Wednesday 13th of April 2011 08:24:13 PM
Just out of interest, what date do you use for the dividends? Pre or post year end?
Say you have a client with a December y/e that you're just doing now, and they have reserves of £30k and an o/d DLA of £20k.
