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Listen in! Pick up some expert advice to a reader's question that we selected from CyberSchmooz.
Featured Biz Question
I'm just starting up a bookkeeping service at home. A few clients who are new to the business would purchase supplies etc. using their personal credit card and pay for this personally NOT thru the business. Am I correct in entering the debits to expenses and the credits to Owner Loan?
On the other side, they have taken money from the business account and paid for personal items. This, I've been treating as a credit to the bank and a debit to Owners Loan. I'd like some feedback on the difference between Owners Loan (Liability) and Owners Contributions and Withdrawals. I understand OC and OW eventually become part of Owners Equity and funds cannot be removed from this. I try to get them not to do this, but when they do, what are the correct entries?
Thanks, Merilee
Answer from our Guest Expert Peter Soh of AdviseInc.com
Hi, Merilee,
Good luck with your home-based bookkeeping business, and thanks for your question on personal expenditures. The two set-up options you mention are fine, but here are a few suggestions regarding them.
With the structure as a "Loan to Company" or a "Loan from Company," you should have a written arrangement regarding the loan aspect. And if it's for more than $10K, you'll need to charge interest.
If you use the structure as an "Owner's Draw or Distribution"
or "Owner's Contribution," things are very simple; there's no
written agreement. However, if the business is a C or S corporation or
a sole proprietorship, you might need to review some tax issues, but most
likely, it'll be okay as is.
Now, you could also consider structuring these transactions as a reimbursement
for expenses made on the company's behalf. Similar to employee reimbursements,
the company will pay back the expense, within 60 days or so. If it is
not reimbursed, the owner/employee can then claim this on his or her tax
return (but it's subject to 2 1/2% AGI limits). Just food for thought
for you.
As far as journal entries are concerned, one side obviously will be for "cash" and the other will be either "loan," "distribution," "owner's capital," "reimbursable expenses." If you have any further questions, please email me by visiting my bio page here on Idea Cafe.
Peter Soh, CPA and CEO of AdviseInc.com
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About the Expert
Peter C. Soh
Owner of AdviseInc.com
Peter is a savvy certified public accountant dedicated to helping startups.
He is a small business advisor for the U.S. Small Business Administration
and teaches "How to Start Your Business" seminars. more