Your personal bank account shouldn't be in the Chart of Accounts because it's not a business account (one of the main accounting principles is the "Business Entity Concept" - the accounts of the business must be separate from the personal affairs of the owners).
I'd just treat the purchase of the disk drive as
Dr Expense - Computer Maintenance (too small to go in an asset account) Cr DLA
When you reimburse yourself,
Dr DLA Cr Bank
You do this for anything you buy with your funds on behalf of the business, and however you buy the goods (cash, personal cheque, your credit card, etc) is irrelevant to the business.
Depending on your setup, the DLA account might be a "Capital" account - the account which records how much value the owner has put into the business by however means, when the owner is a sole trader. I think (but am not 100% sure, someone else will clarify because my head's a bit foggy right now) that a DLA account is used only in limited companies.
-- Edited by Rob-f58049 on Monday 24th of September 2012 04:43:38 PM
I'm just starting to read up on Bookkeeping so I can understand the accounts of my own business and am able to do some of the day to day bookkeeping tasks. I've read a couple of books and am working towards having a basic understanding of the fundamental concepts of bookkeeping and accounting.
One area I'm struggling to understand and how I setup the accounts for legitimate business expenses which I pay for (I'm the director) using my own personal bank account when I don't have my company debit cards with me. For example I was working on a customer site and needed an external disk drive to store a bunch of files from a customer so I went to PC world and bought one using a personal bank account, this is now company property and will be used by the business cost about £60.
The approach that seemed to make sense to me was to do the following:
Create an account in the bank section which represents the directors personal account within for example NC 1260, edit the chart of accounts to include this within the Current Assets section.
Use the standard supplier process from the suppliers module for the example above of a hard disk drive or use a journal entry for mileage claims.
When it comes round to reimbursing the money to the Director then do Transfer from within the bank module from the Main Bank account NC 1200 to the Directors bank account which will then put the directors personal bank account at 0 to reflect the money transfer which has taken place from the companies actual current account to reimburse the directory.
I also have a directors loan account which would be used for recording any expense claims which are personal but have been put through the business, which I dont intend to do at this point in time.
The next aspect Im not quite sure about is the journal entries for the mileage claim, I can do the calculations to determine the amount of Input VAT (Advisory Fuel Rate * VAT Fraction * Number of miles claimed) .
When entering the Journal entry for the mileage claim I would do the following:
Mileage Claim NC 7306: DB Mileage Claim amount ex VAT
Directors Personal Bank Account NC 1260: CR Total Claim Amount
The bit Im not sure about is where to put the Input VAT. The standard purchase process places into the Purchase Tax Control Account NC2201.
Any thoughts on the overall approach described above and the how to handle the VAT component on the mileage claim would be very much appreciated. If this is a basic aspect of accounting please feel free to point me to the area I should be reading up on instead of going into the details.
Your personal bank account shouldn't be in the Chart of Accounts because it's not a business account (one of the main accounting principles is the "Business Entity Concept" - the accounts of the business must be separate from the personal affairs of the owners).
I'd just treat the purchase of the disk drive as
Dr Expense - Computer Maintenance (too small to go in an asset account) Cr DLA
When you reimburse yourself,
Dr DLA Cr Bank
You do this for anything you buy with your funds on behalf of the business, and however you buy the goods (cash, personal cheque, your credit card, etc) is irrelevant to the business.
Depending on your setup, the DLA account might be a "Capital" account - the account which records how much value the owner has put into the business by however means, when the owner is a sole trader. I think (but am not 100% sure, someone else will clarify because my head's a bit foggy right now) that a DLA account is used only in limited companies.
-- Edited by Rob-f58049 on Monday 24th of September 2012 04:43:38 PM
Hi there,
Rob is correct with his treatment of the expenses paid from your personal account and the fact that you shouldn't include your personal bank account in the business chart of accounts. A Director's Loan account should appear in the Capital section of your accounts in the Balance Sheet as it is a Liability of the business. A Director's Loan account only appears in Limited Company accounts as only Limited Companies have Directors. (Someone correct me if I'm wrong!)
With regard to VAT on your mileage, personally I would set up a supplier account for yourself and enter the amount of mileage net of VAT and type in the actual amount of VAT claimed in the VAT column. As you said you can only claim the VAT on the fuel part of the mileage allowance and you need to keep all your fuel receipts as well. Most people don't bother reclaiming VAT on their mileage as it is minimal and saves a lot of hassle.
Thank you both for taking the time to answer my question. That all makes a lot of sense and I hadn't taken into account the separation of personal concerns from the company.
One question I have about the approach described by you both is about setting up myself as a supplier for mileage is how does that work with respect to the VAT. When I make a purchase the VAT receipt will have the VAT number for the company who I buy the petrol from. Is the thinking that as you have a valid VAT receipt which covers the fuel component of the mileage claim and the supplier would be something like: Director XX Mileage Claim then it is clear what this and the associated receipts provide evidence of the actual fuel purchase and the associated input VAT which is then claimed?
I've just had a look in sage, I'm using the instant accounts version and it has created a Director's Loan Account in the 'Long Term Liabilities' section in the sub section 'Creditor's' of the accounts using NC 2301, is this OK or should I create an additional Director's Loan account which is located in the Capital Section?
I'm doing quite a lot of driving and the cost of fuel is quite significant so I'm trying to keep my overheads as low as possible and claiming mileage actually makes a large enough difference to warrant the effort, especially as I'm recording my business mileage anyway for the mileage claims, I just have a couple of extra drop down boxes on the mileage claim expense spread sheet which I select the car engine size/type from etc and the numbers are created for me for the input VAT component on the fuel for me.
Thanks,
Mark
-- Edited by mark_a on Tuesday 25th of September 2012 01:17:23 PM
One question I have about the approach described by you both is about setting up myself as a supplier for mileage is how does that work with respect to the VAT. When I make a purchase the VAT receipt will have the VAT number for the company who I buy the petrol from. Is the thinking that as you have a valid VAT receipt which covers the fuel component of the mileage claim and the supplier would be something like: Director XX Mileage Claim then it is clear what this and the associated receipts provide evidence of the actual fuel purchase and the associated input VAT which is then claimed?
Thanks,
Mark
-- Edited by mark_a on Tuesday 25th of September 2012 01:17:23 PM
Hi Mark,
The fuel receipts are really just evidence that you have spent the money on petrol to cover the mileage claimed so you don't need to worry too much about it. Sounds like you have got things under control with your spreadsheet etc. It's just if you had an inspection and HMRC were to say "gosh...you've claimed a lot of mileage" you have the petrol receipts to hand to back it up.
Just checked and my DLA is in the Long Term Liabilities as well, so think it will be fine here.
Thank you for confirming the location of the Director's Loan accounts and definitely want to be very sure I can provide evidence of all transactions should HMRC require me to
I've had a go at setting myself up as a supplier and I know remember why I thought I would set up a bank account which would represent the Director's personal account. When you start the supplier purchase process in sage you create a new batch invoice which all works well, once complete you then need to make a payment in Sage (I'm using instant accounts 2012) when making the payment you can only make a payment to the Director XX Mileage claim supplier from a nominal account which is considered to be a 'bank account' and as the Director's loan account isn't considered a bank account, I can't find a way to make a payment from the Director's loan account, am I missing something here? I've had a good look but still nothing. I suppose this could well be a limitation of Sage and to broadly seems sensible as it wouldn't be possible to make a payment from anything that a bank account to an external entity.
Doesn't Sage let you enter journal entries which you can basically do whatever you want (assuming you don't mess with control accounts)? This is where knowing in which accounts to use debits and in which accounts to use credits to get what you want to happen, is really important, so make sure you're totally familiar with that.
Yes you can do journal entries in sage, but was trying to work out an easy way of doing so I don't have to do the journal entries and yes I need to be sure I get the credits and debits right. I think I've got that worked out OK. But will test it all out in the demo-mode in sage before I do it on my live data.
OK, you can do one of two things here. If you are not going to be paying yourself the mileage but just offsetting it against money owed to you on your DLA then there is no point in setting yourself up as a supplier as it will involve creating a DLA as a bank account and including it as a current asset or current liability in the "floating" nominals in your COA. Some people do create the DLA as a bank account and make payments from this.
If you just want to offset your mileage against your DLA to be paid at a later date then you will need to do a journal as follows:-
DR Mileage allowance (73xx) xxx
DR VAT on fuel portion of mileage (2201)
CR DLA (23xx)
Then if you do pay yourself back for the mileage at any point all you need to do is make a bank payment to the DLA account.
Whilst a lot of the above is correct, from a bookkeeping point of view I always set up a dummy bank account on Sage (or whatever accounting system I use) for this purpose. At teh end of the accounting period I then do a 'bank' transaction to clear the account to the Directors loan account. If any management accounts are required I would merge the balances to create one loan for the director.
For me it just makes it easier to record than journals.
__________________
Phil Hendy, The Accountancy Mentor
Are you thinking of setting up your own practice or have you set up and need some help?
If so a mentor may be the way forward - feel free to get in touch and see how I can assist you.
Oh and Directors loan account should always be a current liability (or current assets if applicable) unless a formal arrangement is in place to repay the loan over a longer timescale.
__________________
Phil Hendy, The Accountancy Mentor
Are you thinking of setting up your own practice or have you set up and need some help?
If so a mentor may be the way forward - feel free to get in touch and see how I can assist you.
Thanks for the reply. That was my original thinking the naming I chose probably made the approach seem to conflict with keeping business and personal finances separate. I agree using a dummy account of this type definitely makes everything much easier as I wouldn't have to perform any journal entries on a regular basis, even though its relatively straight forward it seems to me there's more work involved in getting it right.
The point about the Director's Loan Account used for recording business expenses etc being in the current liabilities makes sense as they are short term. I assume a Directors Loan Account located in the Long term Liabilities if the company has given a financial loan to a director.
