Understanding your Director’s Loan Account
A Director’s Loan Account (part of Limited Company accounts) is an important piece of the accounting puzzle that links yourself (the Director) to the business, which is a separate legal entity. The purpose of this account is to keep a clear record of financial transactions between the Director and the company. It is important to understand how your Director’s loan account works, and to make sure that you are using it correctly to ensure transparency and proper accounting.
Your Director’s Loan account is used to record two types of transactions:
Money being introduced or lent to the company by the Director – this is recorded as a credit in the account.
Money withdrawn by the Director - If a director has taken money from the company’s funds for personal use, this is recorded as a debit to the account to show that the Director now owes the money back to the company. Alternatively, this can be used to account for the Director repaying themselves an amount that has previously been introduced to the company.
A healthy Director’s Loan Account will show as a credit balance on the accounts, as this demonstrates that the company owes the Director funds. A debit balance, meaning that the Director owes money to the company, is a red flag for HMRC. If a debit balance is recorded on the financial statements, the Director will have nine months from the year end to repay this amount to the Company. If repayment is not made during the time frame, the balance of the loan subject to 32.5% corporation tax.
It is important to keep track of both the transactions within the account, and the balance, to ensure that you are only withdrawing what is available as the Director’s Loan Account can be an indicator of the company’s financial health. If Directors are consistently borrowing from the company, it may raise concerns about the company’s stability.
If you have any questions about your Director's loan account, send us an email and we'd be happy to have a chat.
Written by Holly Mann