My client has a number of friends investing in his business. Basically they give him the money to buy a car, he buys it, processes it, sells it on and the split the profit. He keeps 35% they take the remaining 65%.
I'm just wondering the best way to show this in his accounts. I have to process it all by journals as the initial purchase etc I have put through the books as normal as I didn't know he did this, and the expenses I put through the Purchase ledger aren't allocated specifically to an investor/car. I basically have a final list of figures to put through.
Would you set up the investors individual accounts under capital and make the relevant journals. I'm just winding myself up in knots about the best simplest way of working it out. He is keeping seperate spreadsheets so I think I only need to show the final values if that makes sense and not the details of each transaction.
So, for example:
Investor A Invested £4750.
Net Profit £902.00
Profit to A £ 586.30
Profit to Company £315.70
It's really messy and I don't like it at all to be honest. I think I just need to show the investment and return on investment somewhere.
In terms of the Individual accounts and possible journals, and what you could and could not use will depend on the type of structure the business is operating under.
For example, if it was a sole trader you could prepare the accounts as normal but have a separate summary to show the relevant profit splits as a note to the accounts. However, if it is a Limited Company your options will be be restricted to rules governing their preparation.
Whichever type of business structure, a separate summary may suffice it depends on the business owners and investors requirements.
Hope this helps.
Ben
To my mind this is just a short term loan arrangement.
The investors are not buying shares in the company, and they are not buying the goods themselves to be sold on by the company (so this is not a commission arrangement).
Investor X loans the company £4750 to be repaid at the sum of £5336.30 being a return of 100% of the capital plus interest on the capital of £586.30.
Your concern is that your client takes out a loan, pays interest and returns a profit of £315.70.
If this is a more formal arrangement and the investors are part of the company then they should be declared as such.
The arrangement with the suppliers of finance needs to be formally documented.
The issue of not knowing the interest to be paid at the point of the loan (interest being based on a share of profits) causes an issue over the liability to be recognised but you do know the amount of the loan and interest becomes clear when loan is repaid. As these are short term loans even where the loan amount goes over a period end the repayment shortly after the yearend will evidence the interest repayable so there should not be much of an accruels issue here.
Careful not to involve your client in the tax affairs of the investors. Keep them totally seperate. Your client receieves a loan and repays the loan (with excessive short term interest for which they would possibly be better off with an overdraft arrangement with a bank) and that is where the arrangement needs to end. Don't allow your client to feel that the investors are somehow part of the company which due to the closeness of the business relationship they may do.
Also ensure that your client knows the original source of the money as this would be your typical money laundering type of operation.
As an aside, these loose type of arrangements are often mired with underdeclaration of income. Whether the interest being returned to the individuals giving the loan is being declared by those giving the loan is not your concern but be aware of an additional issue that if there is anything amiss with the arrangement your records relating to your client may be called upon for forensic evidence.
Overall advice on this one is to just keep it simple. With the lack of any commercial substance between those giving the loan and those taking it (this isn't commission, the investor isn't buying into the company and the person giving the loan does not share substantially in the risk and reward of the business, only the reward), the arrangement as I see it for the books is a short term loan and nothing more (no matter how the client see's it).
Interested to read others takes on this one.
kind regards,
Shaun.
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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.
Thanks everyone. I think you are right. I am over complicating it.
Because the owner uses the term 'investment' I think it's making me think the wrong way. It really is a short term loan and I think I will handle it that way. I definately don't want to involve my client in any of his friends tax interests as it is (rightly or wrongly) a very informal arrangement. The spreadsheets are there should his accountant (or anyone else) require any further details.
The huge amount of cash being moved around this business is giving me the most almighty headache. But that is a whole new issue!
