# General Business Category > Accounting Forum >  how do you deal with a business loan from the owner(s)?

## SilverNodashi

Hi all

I need to start getting our books up to date, and I'm looking for some practicle answers, please  :Smile: 

If myself and my wife has invested a bit of cash, and some goods (PC's, furniture, office supplies, etc) to the business in the beginning, but the business couldn't pay as yet, how do we proceed to get that money back, on the books?

If we want to put interest on it, what is the recommended rate?
Do we need to put interest on the total amount, over a yearly period, or how does it work?

What happens if a salary couldn't be paid on some of the months? Do we back-pay it, or do we put it on as a loan amount as well?

We use Quickbooks 2008, so any practical tips on this would be appreciated as well, but general book keeping stuff is fine too.

----------


## duncan drennan

The way I have it set up is that I have a loan account ("Duncan loan") which is set up as a bank account. Whenever I pay something from my personal account (e.g. credit card) then it gets paid from that "Duncan loan" bank account.

I journal salaries like this,

Debit: Members salary with full salary amount
Debit: UIF with UIF amount (company contribution)
Credit: Payroll liabilities with all deductions (PAYE + full UIF amount)
Credit: "Duncan loan" with the amount due (salary - deductions)

Any payments to me then go against "Duncan loan". At the end of the year the loan is declared in the audit as an interest free directors loan (this will vary depending on CC or PTY), which is typically in the favour of the business (i.e. the business owes me). If it works out the other way (you owe the business) then the auditors would probably charge interest on the balance at the end of the financial year.

Hope that helps

----------


## Dave A

That looks good, Duncan. Although I wouldn't keep the official director's loan account as a bank account. Rather add an account as a long term liability or equity account.

Have a separate account as a bank account (I call mine petty cash - dave) for all the day to day and month to month transactions. Then you just clean the undrawn portion of that transaction account out to the loan account every 6 months or so.

SoftDux - in your situation I'd have you and your wife's loan accounts as separate sub accounts of a Directors Loans account.

You can charge interest on the loan account although it isn't common practice. I think it is because when no interest is charged, anyone evaluating your financial position (such as your banker) will see the loan as part of the equity in the business. If you *are* charging interest, it will be seen as a long term liability. This affects the deemed nett worth of the business.

As Duncan says - if you owe the company money, the company will be obliged to levy interest against the loan to you. But I'd leave that to the accountant/auditor to work out how much. The statutory minimum rate changes from time to time.

The decision in terms of handling undrawn salary is a little more complex. Factors include who owns the business and *why* you didn't draw the salary.

Assuming you and/or your wife are the only shareholders/members:
If the business couldn't pay because of a temporary cash flow problem, but the business is showing a trading profit, put the salary through as if it had been paid out of your personal (bank) transaction account.

If the business is showing a trading loss - you've got some decisions to make. If you are confident it is going to turn around, and you're happy drawing a smaller salary, then adjust your salary lower. 

If you're not confident the business is going to turn around - well that's a whole new ball game which I trust doesn't apply in this case.

----------


## SilverNodashi

> The way I have it set up is that I have a loan account ("Duncan loan") which is set up as a bank account. Whenever I pay something from my personal account (e.g. credit card) then it gets paid from that "Duncan loan" bank account.
> 
> I journal salaries like this,
> 
> Debit: Members salary with full salary amount
> Debit: UIF with UIF amount (company contribution)
> Credit: Payroll liabilities with all deductions (PAYE + full UIF amount)
> Credit: "Duncan loan" with the amount due (salary - deductions)


What program do you use?




> That looks good, Duncan. Although I wouldn't keep the official director's loan account as a bank account. Rather add an account as a long term liability or equity account.


That's what I have so far as well. 




> Have a separate account as a bank account (I call mine petty cash - dave) for all the day to day and month to month transactions. Then you just clean the undrawn portion of that transaction account out to the loan account every 6 months or so.


I have 2x Credit Cards, and one Current account, so I guess I need to list all 3 of them?




> SoftDux - in your situation I'd have you and your wife's loan accounts as separate sub accounts of a Directors Loans account.


Ok, so I setup one long term liability account, "Directors Loans", and then 4 sub accounts, "Rudi - VISA", "Rudi - Master Card", "Rudi - Current Account", "Petra - Savings" ? Thought we don't use my wife's savings, nor my current account. We did however put some money into the business 2 years ago from those accounts. Due to many reasons the business hasn't repaid the loan(s) yet. 




> You can charge interest on the loan account although it isn't common practice. I think it is because when no interest is charged, anyone evaluating your financial position (such as your banker) will see the loan as part of the equity in the business. If you *are* charging interest, it will be seen as a long term liability. This affects the deemed nett worth of the business.


Is it against the law to charge interest on the loan to the business? Surely if we were to take a bank loan, the business had to repay the bank some interest as well?

I don't think I'm going to bother going to the bank for a loan though, but will apply for a cc & garage card at some stage. Standard Bank's business Credit Card & Garage card system is crap, FNB's is better, but we only opened an FNB Current account recently, and need to transact for a whole year before they consider giving us a CC & Garage Card




> The decision in terms of handling undrawn salary is a little more complex. Factors include who owns the business and *why* you didn't draw the salary.
> 
> Assuming you and/or your wife are the only shareholders/members:
> If the business couldn't pay because of a temporary cash flow problem, but the business is showing a trading profit, put the salary through as if it had been paid out of your personal (bank) transaction account.


We've been paying one salary to date, since I use extra cash in the business for business growth, but I need to start paying the second salary. 




> If the business is showing a trading loss - you've got some decisions to make. If you are confident it is going to turn around, and you're happy drawing a smaller salary, then adjust your salary lower. 
> 
> If you're not confident the business is going to turn around - well that's a whole new ball game which I trust doesn't apply in this case.


No loss so far  :Smile:  Just slow growth

----------


## Dave A

SoftDux - keep the transaction accounts such as credit cards etc. as bank accounts and have just one loan account per director - which is used mainly to carry values through end of financial year.

You don't want too many transactions on your director's loan account. It's something auditors look at quite closely and have to report on. Make it easy for them. I'm sure you'll appreciate the lower audit fee  :Wink:

----------


## SilverNodashi

but I can't do it otherwise. Most of our purchases happen on the credit card, purely because we purchase & rent servers & licenses (like cPanel, RVSite Builder, Modernbill, etc), from USA / UK based companies, which I can only pay with a credit card. Even Google uses the CC. Using either the VISA or Master Card really depends on who I need to pay, and how much, since the one takes longer for the money to go from the current account, and the other has more expensive payback rate

----------


## Dave A

No problem with that. Have the credit card as one of the business bank accounts by all means.

What I *am* suggesting is you seperate it from your loan account.

----------


## SilverNodashi

ok, so I have the 2 CC accounts for day to day / month to month expenses (like paying telkom, cPanel, Host NOC, etc), and then keep the Loan totally seperate, for example bigger / longer term investments into the business?

What do I classify the payments as in Quickbooks?


So, how do I manage the loan account? Do I pay it back monthly? Over what terms, and at  what rate? What do I classify the payment as in Quickbooks?

----------


## duncan drennan

I use Quickbooks 2006.

Why not just bundle all the accounts you transact on into a single account in quickbooks? i.e. have a directors loan account, and (as Dave said) have a "Petty Cash - Rudi" bank account. Put all the various payment you make on behalf of the business (e.g. credit card payments) through that one account.

At the end of the day from a business perspective it is a short term liability.

Wrt the loan, I don't see why there have to be specific terms of repayment laid out. Are there other shareholders/directors?

----------


## Dave A

You need to disclose the terms of repayment in the annual financial statements. This categorises the nature of the liability for the company - either short term, long term, or as I mentioned earlier, part of the capitalisation of the business but dealt wth via loan account rather than issued share capital.

----------


## duncan drennan

> You need to disclose the terms of repayment in the annual financial statements. This categorises the nature of the liability for the company - either short term, long term, or as I mentioned earlier, part of the capitalisation of the business but dealt wth via loan account rather than issued share capital.


Quite right. I was thinking more along the lines of why have any other terms than an interest free loan from the director (in the case that the director is the only shareholder).

The specifics of the terms would vary depending on the company structure.

----------


## SilverNodashi

> I use Quickbooks 2006.
> 
> Why not just bundle all the accounts you transact on into a single account in quickbooks? i.e. have a directors loan account, and (as Dave said) have a "Petty Cash - Rudi" bank account. Put all the various payment you make on behalf of the business (e.g. credit card payments) through that one account.
> 
> At the end of the day from a business perspective it is a short term liability.
> 
> Wrt the loan, I don't see why there have to be specific terms of repayment laid out. Are there other shareholders/directors?


I could do that. From a practical stand point, if I pay a server, or Telkom or so, and I pay it from either card it doesn't matter, cause it's from the "pooled account", right?




> You need to disclose the terms of repayment in the annual financial statements. This categorises the nature of the liability for the company - either short term, long term, or as I mentioned earlier, part of the capitalisation of the business but dealt wth via loan account rather than issued share capital.


Ok, I understand this. Does it make a difference if I do so after the money was lent to the business? We were rather ignorant when we started out, and grew / learned as we went along.

----------


## Dave A

> Does it make a difference if I do so after the money was lent to the business?


That shouldn't be a problem at all. As long as both parties (you and the business) agree  :Big Grin:

----------


## duncan drennan

> I could do that. From a practical stand point, if I pay a server, or Telkom or so, and I pay it from either card it doesn't matter, cause it's from the "pooled account", right?


Yes, that one "pooled" account is a total of all the money the business owes to you for day-to-day running expenses.

----------


## Megan06

Hi there! I figured that this would be thread for my question as it is similar.
I am working with Pastel. Unfortunately the company is too small for Pastel payroll. I am having a bit of a blonde moment (yes I am blonde, so I am entitled to these moments): I have a GL account - Asset - Staff Loan. I debit this account, and credit the bank when an employee makes a loan with the company. Now the employee has asked that we deduct R100 per month from his wages to pay the loan. In other words we pay him R100.00 less. How do I record the loan repayment? Thank you in advance for any help!

----------


## BusFact

You do this when doing the journals for the wage slip, eg:

D wages, C bank account - Nett wages actually paid to employee
D wages, C UIF account - UIF deduction
D wages, C PAYE account - PAYE deduction
D wages, C staff loan account - Loan repayment amount each week.

Thats assuming you're not using any control accounts. Does that work for you?

----------


## Megan06

Thanks for the quick reply. That is great!..... *blush*... it was actually as easy as that.... will try to ask more challenging questions next time  :Wink:

----------

