Sage Accounts - Directors Loan

Matt341

Hello,

I am new to this forum so I hope I have posted this query in the correct section.

I have reached a complete mind blank dealing with a Directors Loan account on Sage and would appreciate some advice with the matter.

Situation is as follows :-

A customer started his business in September 2010 at which point he injected cash into the business startup. I only started working with him in late 2011 so did not complete his books for his first year trading. I setup Sage for the beginning of his 2011 financial year and setup a separate Directors Loan Bank Account (1230) so that he could keep track of business expenditure paid for personally and subsequently reimburse himself monthly. My customer also requested for his directors loan amount from 2010 to be added to Sage so that he could monitor how much the company still owed him.
At this point I credited the Directors Loan bank account and debited the Loan Account (2300) with the amount injected to the company at the start of trading, less the amount reimbursed to the director in 2010, therefore the amount of outstanding loan at the start of 2011. The Directors Loan bank account (1230) now showed an accurate figure of what was owing to the Director.

The loan has now nearly been cleared and the Directors Loan bank account is only showing a very small amount in credit. This was undertaken using simple transfers from the main account (1200) to the Directors account (1230), regularly throughout the year.

However, my concern is that the Statement of Financial Position still shows the full debt at the start of 2011 financial year of business as a long term liability, even though he has nearly fully paid this off during the year. This is being picked up from Nominal ledger Loan (2300).

I am completely at a loss now as to what action to take next to clear the loan ledger (2300).

I apologise if this sounds a silly question but I just keep hitting a black moment with it!!

Many Thanks in anticipation.
Matt.

coojee

Matt341 wrote: »

Hello,

I am new to this forum so I hope I have posted this query in the correct section.

I have reached a complete mind blank dealing with a Directors Loan account on Sage and would appreciate some advice with the matter.

Situation is as follows :-

A customer started his business in September 2010 at which point he injected cash into the business startup. I only started working with him in late 2011 so did not complete his books for his first year trading. I setup Sage for the beginning of his 2011 financial year and setup a separate Directors Loan Bank Account (1230) so that he could keep track of business expenditure paid for personally and subsequently reimburse himself monthly. My customer also requested for his directors loan amount from 2010 to be added to Sage so that he could monitor how much the company still owed him.
At this point I credited the Directors Loan bank account and debited the Loan Account (2300) with the amount injected to the company at the start of trading, less the amount reimbursed to the director in 2010, therefore the amount of outstanding loan at the start of 2011. The Directors Loan bank account (1230) now showed an accurate figure of what was owing to the Director.

The loan has now nearly been cleared and the Directors Loan bank account is only showing a very small amount in credit. This was undertaken using simple transfers from the main account (1200) to the Directors account (1230), regularly throughout the year.

However, my concern is that the Statement of Financial Position still shows the full debt at the start of 2011 financial year of business as a long term liability, even though he has nearly fully paid this off during the year. This is being picked up from Nominal ledger Loan (2300).

I am completely at a loss now as to what action to take next to clear the loan ledger (2300).

I apologise if this sounds a silly question but I just keep hitting a black moment with it!!

Many Thanks in anticipation.
Matt.

First off, what were the opening balances when you started? You said that you didn't do the first years account.

What should have happened when he introduced money into the business is that the expense/asset account for the thing that he was paying for should have been DR'd and the Directors Loan Account should have been CR'd. Say he personally paid for a van then it would be DR Motor Vehicles and CR DLA.

Then when the company repays him you do DR DLA and CR Bank. That way the DLA records all the monies owed to and from him.

Without seeing the figures it's going to be difficult to unpick what's been done as it sounds from what you've said as if some of last years figures have been introduced but not all of them. Forgive me if I'm misunderstanding what you've said. The main problem is the DR to the loan account 2300, that should never have happened as that was setting up a debtor in effect, what should have happened is that all of last years figures should have been brought in as opening balances, then you'd have had a CR balance on the DLA and all the expenses/assets would have been taken into account in the opening figures.

I guess this is why you're not getting many replies as it sounds a bit of a mess to me. Sorry :-( No wonder you're hitting a brick wall.

Matt341

HI, Thank you so much for taking the time to reply.

I agree that the accounts from the first year were a real mess and unfortunately this has caused the following years to get tangled up. From what I can establish, the funds injected by the director were all used to "buy" a current client base from another company. My thoughts are that this should therefore be treated as Goodwill as the company effectively bought Goodwill from another company to enable it to establish. In the last financial year 20% of the amount was written off as Goodwill amortisation by the accountants undertaking the accounts at the time.

My thought now is to credit the loan account 2300. Debit Goodwill with the full amount, credit Goodwill with the accumulated Depreciation (Amortisation) for the last couple of years and debit accumulated Depreciation and then for the end of this financial year debit Depreciation Expense so that it shows in the financial statements but I still think this sounds incorrect as the whole amount has virtually been paid off by the loan account.

However, I appreciate its a fixed asset and therefore is written off over a period of time in the financial statements so maybe my ideas above are ok.

Dealing with the Directors Loan account in general is no problem, i.e. if the Directors pays for something personally then Cr the Directors Loan account Dr the expense account. And for reimbursement, Cr the main bank Dr the loan account. It's just dealing with this opening amount from a few years ago that is managing to confuse me everytime!

I would really appreciate some further advice on this, hopefully the info provided above will help a little more.

Thanks
Matt.

coojee

Matt341 wrote: »

HI, Thank you so much for taking the time to reply.

I agree that the accounts from the first year were a real mess and unfortunately this has caused the following years to get tangled up. From what I can establish, the funds injected by the director were all used to "buy" a current client base from another company. My thoughts are that this should therefore be treated as Goodwill as the company effectively bought Goodwill from another company to enable it to establish. In the last financial year 20% of the amount was written off as Goodwill amortisation by the accountants undertaking the accounts at the time.

My thought now is to credit the loan account 2300. Debit Goodwill with the full amount, credit Goodwill with the accumulated Depreciation (Amortisation) for the last couple of years and debit accumulated Depreciation and then for the end of this financial year debit Depreciation Expense so that it shows in the financial statements but I still think this sounds incorrect as the whole amount has virtually been paid off by the loan account.

However, I appreciate its a fixed asset and therefore is written off over a period of time in the financial statements so maybe my ideas above are ok.

Dealing with the Directors Loan account in general is no problem, i.e. if the Directors pays for something personally then Cr the Directors Loan account Dr the expense account. And for reimbursement, Cr the main bank Dr the loan account. It's just dealing with this opening amount from a few years ago that is managing to confuse me everytime!

I would really appreciate some further advice on this, hopefully the info provided above will help a little more.

Thanks
Matt.

I don't know specifically about how you would treat the purchase of a client base but goodwill seems to be a good starting point. Is the amount in account 2300 the same as the amount paid for the purchase? If it is then it's easily fixed like you say, DR Goodwill and CR 2300. That gets rid of 2300 and leaves you with a goodwill account that you can then do what you like with, either write off completely or depreciate over a number of years. It doesn't matter that the money originally came from the director and he's now had all his money back - that's irrelevant. If you buy a car with a bank loan the car is still in the accounts even when the bank loan has been paid off.

Matt341

Thanks for your reply.

I believe the majority of the amount was paid for the client base but a small amount was spent on office equipment. I will speak to the Director to confirm this.

I will also check how much depreciation was charged last year so I can journal this across to the accumulated depreciation account on Sage.

I have already completed a few of the journals and the financial statements already have a better indication. I.e Goodwill as an asset and only the small amount of remaining Directors loan as a Liability. I appreciate though that the accumulated depreciation/amortisation has to be considered from the previous year as well.

Thanks again for your much appreciated advice.

Matt.