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Directors Loan Account

What is it?

A directors loan account is where the transactions between a company and its director are categorised. The balance in a directors loan account shows how much the company owes the director (credit balance) or how much the director owes the company (debit balance) which is also called an overdrawn directors loan account.

32.5% Tax on an Overdrawn Directors Loan Account

It’s important to know how to record a directors loan account properly and to check its balance. The reason being, is that an overdrawn directors loan account at a year end can cost the company 32.5% tax (was 25%) on the balance. That tax is applied if the overdrawn directors loan account is not repaid within 9 months of the year end.

What to account for in a Directors Loan Account

Company transactions

If a company makes a payment to a director, that is not wages, expenses or dividends, the payment should be categorised (debited) to the directors loan account.

If the company pays for something on behalf of the director e.g. personal expenses put on a company credit card, the payment/bill should be categorised (debited) to the directors loan account.

If the company received money on behalf of the director, the income should be categorised (credited) to the directors loan account.

If dividends are not paid in full directly to a director/shareholder, they should be credited to the directors loan account and the transaction date becomes the date the dividends were ‘paid’.

Director transactions

If a director pays out of their own pocket for the company’s costs, or incurs expenses on behalf of the company, the company should debit the expense category and credit the directors loan account.

If a director receives income on behalf of the company, the company should record that amount as a credit against sales/vat/debtors and a debit against the directors loan account.

Online Accounting Software

Recording a Directors Loan Account is easy when you use online accounting software. There are many other benefits to using online accounting software which you can read about here. We are Wave Accounting and Xero Accounting specialists but we can also help you use your choice of online accounting software to record a directors loan account. See some other online accounting software we support and you can see our fixed fees here.

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Directors Loan Account in Wave

 
Wave Accounting provide free online accounting software paid for by discreet advertising.  Recording a directors loan account in Wave Accounting is easy.
Directors Loan Account

Setting up the Directors Loan Account in Wave

Wave provide a special Shareholder Loan account by default for companies, which can be used (and renamed) as the Directors Loan Account. It’s a special account because it appears as both a Category and an Account in Transactions to make recording the Directors Loan Account easy. To rename it go to Accounting, check you are in the Accounts tab, scroll down to Liabilities/Credit Card, then alongside Shareholder Loan click on the pencil button to rename it.

To add the Shareholder Loan account again if you’ve deleted it, or if you have more than one director, here is what you need to do. Go to Accounting and check you’re in the Account tab. Click on the button Add an Account, then Liability/Credit Card, Current Liability, Current Debt, Shareholder Loan. Then edit the name if you like before clicking Save.

Entering transactions in the Directors Loan Account in Wave

After setting up a Shareholder or Directors Loan Account for each director (see above), you are now ready to enter transactions to or from it. To help you record the transaction correctly, you need to ask yourself – has the transaction gone through a company account e.g. company bank account or company credit card which is recorded on Wave?

Company Transactions

If yes, the transaction has gone through a company account, the transaction may already appear in Wave via a bank feed or if you uploaded a bank statement so you can skip steps 2-4:

  1. Go to Transactions
  2. click Add Income if the amount was received into the company account, or
  3. click Add Expense if the amount was paid out of a company account
  4. Enter the details: date, description, amount
  5. For the category select Shareholder or Directors Loan Account
  6. For the account select (or leave) the company bank or credit card account it went through.

Director Transactions

If no, the transaction has not gone through a company account:

  1. Go to Transactions
  2. click Add Income if the amount was received by the director
  3. click Add Expense if the amount was paid by the director
  4. Enter the details: date, description, amount
  5. For the category select the appropriate category – usually an Income or Expense
  6. For the account select Shareholder or Directors Loan Account

Additionally, if the income or expenditure is for a sales invoice or bill that is already on Wave: click on the button on the right alongside the transaction, select create invoice/bill payment, then find the sales invoice or bill.

Checking the Directors Loan Account balance in Wave

To check the balance of a Shareholder or Directors Loan Account in Wave, there are a few ways:

  • Go to Transactions, filter the Account to Shareholder or Directors Loan
  • Go to Reports, Balance Sheet, find the account
  • Go to Reports, Trial Balance, find the account
  • Go to Reports, Accounting Transactions, select the account

 

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Directors Loan Account in Xero

 
Xero Accounting are leading the way in the UK with online accounting software. In our opinion Xero is the best and easiest to use online accounting software for small businesses. Recording a Directors Loan Account in Xero Accounting is easy.
Directors Loan Account

Setting up the Directors Loan Account in Xero

Xero provide by default a Directors Loan Account (830). However, it will be much easier to avoid using this account except where it is the only option (e.g. when using Xero Payroll). Instead, we suggest you add a bank account and call it a Directors Loan Account. By doing this, it becomes much easier to add expenses directly to the Directors Loan Account, and transfer money to/from it and the company bank accounts. Here is how you set it up:

Click on Accounts, Bank Accounts, then Add Bank Account. Type into the bank search ‘Directors Loan Account’ it won’t find a bank called that so you can then click on Add it Anyway. Type ‘Directors Loan Account’ again in the Name, chosse Account Type: Other, then enter any 8 numbers for the account number and any 6 numbers for the sort code. Finally click Save.

That’s it, you can now use your new Directors Loan Account from the Xero Dashboard to add expenses and record transfers to/from the Directors Loan Account.

Entering transactions in the Directors Loan Account in Xero

Xero makes it very easy to enter transactions to the Directors Loan Account when it is set up as described above. As with Wave, you need to ask yourself – has the transaction gone through a company account e.g. company bank account or company credit card which is recorded on Xero?

Company Transactions

If the transaction has gone through a company account, we are assuming that you have a bank feed set up or you have uploaded bank statements:

  1. Go to the bank account
  2. Click on Reconcile
  3. Find the transaction
  4. Click on Transfer
  5. Select the Directors Loan Account
  6. Edit the reference if it’s not clear
  7. Click on OK

Director Transactions

If the transaction has not gone through a company account, and there is no bill or sales invoice for it in Xero:

  1. Go to the Directors Loan Account
  2. Click on Manage or Manage Account
  3. Click Receive Money if the amount was received by the director
  4. Or click Spend Money if the amount was paid by the director
  5. Enter the details: to, date, description, amount
  6. Select the appropriate account – usually a Revenue or Expense account
  7. Click save

If the director paid or received a bill or sales invoice that’s already on Xero: Find the bill or sales invoice; go down to the section ‘make/receive a payment’; enter the details and select the Directors Loan Account; then click on Add Payment.

Checking the Directors Loan Account balance in Xero

To check the balance of a Shareholder or Directors Loan Account in Wave, there are a few ways:

  • Go to the Dashboard or Bank Accounts and see the current balance of the Directors Loan Account
  • Go to Reports, All Reports, Balance Sheet, find the account
  • Go to Reports, All Reports Trial Balance, find the account
  • Go to Reports, Accounting Transactions, select the Directors Loan Account

 

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