Sole trader - use of personal money - The Book-keepers Forum (UK)

Samilou67 · Senior Member

Sole trader - use of personal money

kjmcculloch83 · Expert

It should be credited to capital introduced

Lady of Ledger · Veteran Member

I would put it to 'Drawings'

Shamus · Forum Moderator & Expert

Lady of Ledger wrote:
I would put it to 'Drawings'

Hi Carol,

but that would be money that they are withdrawing from the company rather than putting into it.

Sure you that just did a me and misread the question there.

kind regards,

Shaun.

Unwize Owl · Senior Member

It would depend if he was expecting to get the money back from his business. At the end of the day a sole trader and his business are fairly indistinguishable after all.

I have been told by various accountants to either place as negative drawings, set up the owner as a supplier and wait on paying or introduce capital. The first two imply the owner wants the money back in the short term, the last that he isn't fussed when and is only seeking to improve the business, you might also enter the amount as a short term loan with some justification.

Probably not a useful reply but there is no hard and fast rule to apply.

Shamus · Forum Moderator & Expert

That line about negative drawings leaves me confused as to those accountants reasoning Theresa (This isn't an whose right or wrong post, its a genuine discussion which I hiope helps others if they come accross this reasoning).

Negative drawing can do one of two things. Either reduce the drawings from the capital account or if there have been less drawings than negative drawing such would sit as money introduced in the capital account... Which would be exactly the same as Capital introduced.

Thinking this through the only reason that an accountant would say that would be where drawings are being taken and they are reducing the drawings... which would give exactly the same capital as if capital were introduced and drawings taken.

There would be no difference at all to the bottom line of the Capital Account.

That sounds more as though the accountants concerned have a DLA mindset geared for limited companies than one for self employed clients. It doesn't hurt to think that way as, as noted above, the results would be the same.

I can see it as an approach but it's not a method that I would adopt for my clients.

Then again, we all do things based on how we were taught, for example, if a client is overdrawn at the bank I was always taught that should be a negative current asset where others are taught that it should be a liability.

Over time I've swung around to the mindset of an overdraft being a current liability but I can understand the arguement for the other perspective of an overdraft being a negative current asset.

Kind regards,

Shaun.

StuartAnder · Senior Member

I don't have a business bank account at the moment, so what I have been doing is doing the normal double entry for a purchase. Dr Expense and Cr Bank

This leaves my bank overdue in the accounting books, so I :

introducing cash like this DR Bank, Cr Proprietor or Partner Drawings (Under Capital & Reserves)

Then any drawings later I may take will dr the Proprietor or Partner Drawings account and reduce my capital.

Shamus · Forum Moderator & Expert

Hi Stuart,

thats exactly the way that it should be (and echoes what Kris said without the detail in the first reply of this thread).

StuartAnder · Senior Member

Yay!! lol :)

Unwize Owl · Senior Member

I never said the method I was told to apply was good! I just used it to illustrate the variety of ways the transaction could be handled.

In the case where a negative drawings was used the client in question was a limited company with accounts that closely resembled a bomb site! I doubt anything we were doing did much more than stave off the inevitable collapse of the company.
Something of a shame really - if the chap had come to this particular accountant a year earlier the prior year accounts wouldn't have been so badly scrambled and the company might have been saved. Very much a case where Kris's tag line applies

"If you think it's expensive to hire a professional to do the job, wait until you hire an amateur."

This bloke is now paying the price for an amateur's interference, up to his neck in debt and no clear path out.

EPF_Solutions · Senior Member

Doesn't it depend on whether the amount put in is more or less than drawings to date? If it's less, I think I'd treat it as negative drawings, as effectively he's drawn less than the accounts show. If it's more, treat it as negative drawings to cancel out drawings to date, and put the rest to capital introduced. The accounts then show the state of the business accurately, as the owner can see the net amount he's put in or taken out.

Shamus · Forum Moderator & Expert

For a self employed client the capital account would be exactly the same using either approach.

For a limited company it would be DLA rather than drawings and capital (which for a limited would not change, it would be the retained earnings part of equity that changed)) which is conceptually quite different but in practice the netting off principle is not so dissimmilar in application between the DLA and drawings.

With a limited company I would use netting off the DLA in the way suggested Teresa, for a self employed client I would not, I would instead go down the route of increasing capital on investment and withdrawing money through drawings (rather than investing through negative drawings).

Just my approach and it is not for me to say whether others approaches are better or worse. (Johns approach is a pretty good one).

On the whole hiring an amateur line, there are some shocking examples out there of people giving the wrong advice and having a go at producing accounts and tax returns when they really shouldn't. Only this week I came accross yet another case where a client put blind trust in their representitive and it became apparent that the "professional" knew nothing about which expenses were allowable, what should be capitalised or the proper use of capital allowances.

Again, maybe its just me but I do not tell clients about the mess that the previous person made. That they came to me they probably already know.

lol, just thought of one of the lines that I dropped this week. "My not claiming the AIA we have been given the opportunity to reduce your tax this year by moving the balance to the small pool".

Didn't mention at all that they had paid tax the previous year when they didn't need to, just put a positive twist on things as nobody likes anyone who just throws mud all of the time (no I don't, get that idea out of your heads, lol).

Unwize Owl · Senior Member

I couldn't say if the bloke was told that the original problem was with the prior accountant whose year end paperwork was a revelation - I've never seen anything like it before and I hope it is many years until I see anything like it again! I suspect my 10 year old daughter might have made less of a mess.

Didn't help that neither the owner nor the accountant knew how to operate Sage 50.

I can see what you are saying about the different approaches depending on business type - it makes sense. Equally I like the netting off of the DLA and any further 'investment' to be shown as such, much clearer than a negative DLA to my mind.

Bottom line for me is to complete work in the manner I am asked by the accountants I work for, it isn't up to me to say how such things can or should be treated though I will query things if they look too way out or unusual. Generally I find if something odd comes up that the accountant is glad to have someone flag it - I've only once been told to ignore accuracy (or even legality - wedding clothes are not a business expense no matter how much one dislikes ones potential Mother in Law!) for the sake of speed and I won't work for that outfit any more.