A sole trader can introduce funds into his business but this will be shown as capital introduced in the accounts. It won't be shown as a creditor on the balance sheet in the same way that a loan from a third party (e.g. a bank) would be shown.
__________________
Pearce & Co - Chartered Accountant and Chartered Tax Adviser
Legally there is no separation between the owner of a sole trader business, and the business itself. The separation exists only for accounting purposes, so the owner can't lend money to themselves as a separate legal entity in that case.
However, the person might want some conceptual thing to keep a note of for their own purposes, but then that's essentially what the Capital section of the Balance Sheet means, the money the owner has lent to the portion of their finances that is their business. If it came to it, and Creditors wanted money owed, though, they can pursue that from the business or the owner's personal bank account, it makes no difference.
Thank you very much for your advice! It's always great to hear a second opinion.
Another point, what if the wife of a sole trader lends money to his business, can it be treated as a loan?
Just trying to find a way how to help out somebody who's business is struggling to keep afloat due to poor kashflow and who keeps pumping in his business his and his wifes ISAs...
Business has been very tough all-round for a few years. This sounds like creating an expense to reduce taxation and only the interest on a loan is tax deductable but it could be that there is little in the way of profits anyway. Even in profitable years, the tax saving can be minuscule.
If the problem is purely cashflow, can he take any steps to improve customer payment speed?
It would be very difficult to prove that monies from his wife were in the form of a loan, unless it can be shown that all the other times she has pumped in money were also in the form of loans. Indicators of this would be previous loan repayments, interest and a dated, witnessed loan agreement.
I have a similar problem - my sole trader client borrowed money from his bank (in the company's name) - previous accountant has shown this in accounts as capital introduced. How can I now show the bank (third party) as a creditor?
