Shareholder Expenses

by Tracy
(Vancouver, BC)

The owner often purchases supplies with cash and his personal credit card. I have created an account Due to Shareholder and I enter what he has purchased. I credit Due to Shareholder and debit the account depending on what it is.


My problem is he also periodically takes out cash throughout the month to pay himself back, but it is $40.00 here and $100.00 there, etc..

I know I have to now debit Due to Shareholder but I can't tell which account to credit because he is just taking money out here and there and it obviously doesn't match to any of his receipts. Is there any easier way to deal with him paying himself back?

Should I create another account to credit or should I be crediting the account that I originally entered when he first purchased this stuff. Obviously I will just be estimating and giving a rounded off number because as I stated he takes out 40 here and 100 there. Hope this makes sense.

Tracy



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Hi Tracy,

In Creating An Trail I talk about how to reimburse an owner for business expenses purchased with personal funds.

To assist in reconciling this account, you can see that in QuickBooks, I set it up as a credit card account (current liability) called "Owed to John Doe". I use this account solely for expense
reports.

I save the Shareholder Loan account (long term liability) for actual loans / cash infusions to the company and the subsequent repayments.

My preference is for the owner to always be reimbursed by cheque. However, if the owner is being paid by cash, your entry would be DR Due to Shareholder and CR Cash … or a similar account on your chart of accounts.

If you use QuickBooks, and the cash is from shorting bank deposits, then when I book the bank deposit, I use the bottom portion of the form to book the cash withdrawal by the owner. The journal entry would end up DR Cash in Bank, DR Due to Shareholder, CR Undeposited Funds (or Accounts Receivable if you are not using a clearing account for customer payments).

If possible, suggest the owner/manager get a separate credit card that he uses solely for business purposes. In the event of an audit, mixing personal and business expenses invites CRA to audit both the company and the owner's personal accounts.



P.S. I would like to remind you there is a difference between information and advice. The general information provided in this post or on my site should not be construed as advice. You should not act or rely on this information without engaging professional advice specific to your situation prior to using this site content for any reason whatsoever.

Comments for Shareholder Expenses

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Apr 16, 2011
 Owner Withdrawals From Business Account
by: Nina

I am preparing the personal income tax for a Corporate owner who withdraws money during the year from business checking and credit card accounts for personal use.

Do I include the withdraw amounts to his Dividend Income Account on his personal forms? What is the formula and how is it calculated?
Is there any other option?

Please help. Thanks.

Nina
Apr 16, 2011
 The Bookkeeper's Role and Responsibilities
by: Lake

Hi Nina,

Bookkeeper's need to be cognisant of their responsibilies and roles. I feel very strongly that there are certain functions a bookkeeper should not perform.

What kind of functions would that be? For example, I don't think a bookkeeper should ever do a section 84 rollover ... no matter how simple it looks.

A section 84 rollover is when a sole proprietor incorporates his business. One mistake and the client could be paying for it for years. What at times looks like a simple task is only that if you are aware of ALL the tax laws and rules pertaining to the election being taken.

Section 84 rollovers should be performed by a certified accountant in public practice with a tax speciality ... just my opinion.

Another example of work I feel bookkeepers should not perform is the dividend / salary decision. This too should be performed by a certified accountant.

As I point out in my notes on Loans to Shareholders; "There are very specific rules when a corporation loans money to its shareholders who own more than 10% of the shares and their family members. YOU need to be careful that money you remove from the company is not at risk to be taxable."

In general, as long as the shareholder loans account is in a credit position ... meaning the company owes the owner money, not the other way around ... the cash withdrawals are not classified as taxable income. They are repayments of monies invested with the company.

However, if the shareholder loans account is in a debit position ... meaning the owner owes the company money, then the owner needs to book an appointment with a certified accountant to determine how to handle the transactions for book and tax purposes.

I can't emphasis enough that tax planning happens every day throughout the year. It doesn't happen when you file your tax return.

If you are interested in learning about the owner/manager remuneration options available, take a look at the three part series of articles written by Don Goodison, CFP, FCGA on the topic. You can find how to locate the series by going to the end of the chat in the link above.
Jan 03, 2014
 Shareholders withdrawing cash
by: Anonymous

My client withdraws cash (from the business account) to pay for business expenses. I never see the invoice but have the withdrawal slip ... I just want to double check ... even though he/she is telling me what it is for ... do I still need to code that to the due to/from shareholder account? or do I expense it (with no sales tax break out) and discuss with their accountant at yea end.

Thx in advance for your help
Jan 03, 2014
 Shareholders withdrawing cash
by: Lake

I have a special account in my current assets section of the balance sheet called "No Receipt No Deduction". This is where I code all legitimate business expenses that I don't have the source document for.

Once the documentation (receipts, invoices, etc.) are submitted, I do an adjusting entry to reclassify the entry to the appropriate expense account.

Any items not cleared by year-end are then charged to the shareholder. Before I do this, I run a report showing the shareholder all the expenses that I have no supporting backup. (Truthfully, I prepare the report each month for them but many don't pay attention to it until year-end when they realize how many deductions they will be missing out on.) They usually come back with the 90% of the receipts at that point.

For the remaining 10%, I review them to determine if it is acceptable to expense them without supporting documentation. I may do this for pre-authorized transactions or expenses that are immaterial in amount and purchased on a regular basis for which I do have supporting documents.

If I do expense these items, I never claim ITCs on these as the ETA clearly states you must have a receipt to claim an ITC. I do this by entering a zero tax rate for the GST/HST so it is expensed rather than coded to the GST/HST payable account.
Feb 05, 2014
 Shareholders personal use of inventory
by: Anonymous

I have a shareholder that uses items from inventory for his personal use. How should I post it, as an expense or an accounts receivable?



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Check out this forum post on personal use of inventory. It should help.
Sep 07, 2014
 balance owing to shareholder in shareholders account
by: Anonymous

I have a business in BC where there is money sitting in the shareholders account that is owed to me because the business was purchased with cash.

If I sell the business, can that outstanding money that is owed to me be transferred to the new owner so that they can take it out tax free?
Sep 11, 2014
 Stockholder in QB's a Mess
by: Lecy, Bookkeeper

Hello, I have a question.

I just started with a new client; the business is Properties Rehab. What I found is the Owner has a company checking account, but he is using his personal credit cards to buy or pay for company COGS. Then he writes a refund check for the amount to pay himself.

For Example: He pays gas for his car $40.00 then make a check to himself from the company. The previous Bookkeeper created a Journal Entry for every expense like this and applied it to the Stockholder account.

I need your advice on this issue please I would like to fix it, but I'm afraid to change previous entry in QB's and create a big mess. Thank You.
Sep 13, 2014
 How to process an expense report
by: Lake

Lecy:

I'm not a fan of using journal entries in QuickBooks as a general rule. While I don't recommend you change the prior bookkeeper's entries (unless there is very good cause) here is how I handle processing expense reports from owner managers of a corporation:

How to enter expense reports in QuickBooks
Jul 08, 2015
 Zero value shares
by: Anonymous

I have a client on his first year of operation as private corporation. There was no bookkeeping records during the fiscal year until he realized he needed to file tax return. He says that he and one more his family member owns 50% shares each, but certificates were never issued and the shares have zero value. Obviously, they didn't make any investments either. They were using their personal credit card to pay for some expenses. That's it. I don't know how to treat those zero value shares.
Thanks
Feb 24, 2017
 Due to Shareholder Liability Account
by: Anonymous

Hi,

Our company has a liability Due to Shareholder account where the money accumulates every year and can be withdrawn for personal use tax free. We did not withdraw from the Due to Shareholder account for 2015 and 2014. We want to know if the money is still there to withdraw this year. Thank you for response.
Feb 24, 2017
 Due to Shareholder Account
by: Lake

Short answer - maybe yes.

Longer answer - it depends on whether your books are up-to-date and have been reconciled and if they are accurate. It will also depend if there are any unrecorded transactions that could lead to a taxable event. So without actually looking over the books ...

If the account is truly in a credit balance, then there is no time frame as to when the monies can be withdrawn ... of course your business has to have the cash to allow you to make the withdrawal.

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