The key is in the word Loan and should be treated in the same way except that he DLA is always current.
The DLA will be shown as either a debtor or a creditor (asset or liability).
It is not equity (plenty of things do do into the equity section of the balance sheet but not the DLA).
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.
Thank you Shamus. What about drawings then? I mean when a Director draws cash out of business bank account is it drawings or directors loan? Also when Director's relative (who is not director) lends money to the company - how to treat such situation? Thanks again
directors loan to the company would be treated as a loan to the company so recognise as a liability.
drawings are a self employed concept that is sometimes borrowed when talking about a company but the term is used quite differently. Directors do not actually get to take drawings. They may receieve a salary and / or dividends plus they are able to (short term) borrow against the DLA. They cannot simply take money as if it belonged to them (even if they own all of the shares).
The basic concept comes down to the principle of what is a limited company.
Basically it is a psuedo person with rights seperate to the owners.
The closest way to think of it is as a parent child relationship.
A parent is responsible for caring for the child but the child is totally seperate having its own right and money belonging to the child belongs to the cvhild not to the parent.
With a limited company a director has a fiduciary duty of care over the company and must account for everything that he takes from the company or borrows from the company.
The self employed who have been used to their businesses being an exctenssion of themselves rather than a seperate legal entity find this a particularly difficult concept to grasp (sure that you have seen many posts on here with newly incorporated businesses being treated as piggy banks by their owners).
In real terms the closest that a director would ever get to the concept of drawings would be selling some of their shares in the company so withdrawing initial capital investment.
Everything else would simply be interacting with the DLA.
HTH,
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.
Just one more thing, when Director's relative, say brother (who is not director) lends money to the company - how to treat such situation? Thanks again
note that this is not a DLA but rather an actual loan.
Can get very messy where interest is charged by a relative but assuming no interest payable its just a straight forward liability,
kind regards,
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.
