How to account for personal funds into a sole trader business

[endlessroad]

Hello,

I'm in the early stages of setting up as a sole trader and would like to ask a question to the book keeping / accounting experts out there. I'm sure the answers will be useful to others who might have a similar question.

I have a separate bank account for my business, and it hasn't had any money in it yet.

I need to make a business purchase, and want to see it come out of my business account for neatness. In order to do this, I'm intending to put some money into my business account from my personal account.

So my question is: what is the correct procedure for accounting for such a personal money transfer into my business?

I'm new to book keeping, but as I see it there are two ways money can come into the business - [1] any money it earns, and [2] any money that is put into it personally to give it a kick-start. With the latter, clearly I don't want to be paying tax on it, as it's not earnings.

I've chosen the book keeping software I'm going to use, and will need to know what category / description to use for such personal input!

Many thanks,

Nick

 

[MyAccountantOnline]

Hello,

I'm in the early stages of setting up as a sole trader and would like to ask a question to the book keeping / accounting experts out there. I'm sure the answers will be useful to others who might have a similar question.

I have a separate bank account for my business, and it hasn't had any money in it yet.

I need to make a business purchase, and want to see it come out of my business account for neatness. In order to do this, I'm intending to put some money into my business account from my personal account.

So my question is: what is the correct procedure for accounting for such a personal money transfer into my business?

I'm new to book keeping, but as I see it there are two ways money can come into the business - [1] any money it earns, and [2] any money that is put into it personally to give it a kick-start. With the latter, clearly I don't want to be paying tax on it, as it's not earnings.

I've chosen the book keeping software I'm going to use, and will need to know what category / description to use for such personal input!

Many thanks,

Nick

HI Nick

When you pay any private money into your business bank account its called capital introduced

 

[Eagle]

Good question. Good to know the answer, too.

 

[David Griffiths]

Good question. Good to know the answer, too.

You can't come in here that often, then. The question gets asked about once a week, if not more frequently!

 

[Interimsolutions]

Hello,

I'm in the early stages of setting up as a sole trader and would like to ask a question to the book keeping / accounting experts out there. I'm sure the answers will be useful to others who might have a similar question.

I have a separate bank account for my business, and it hasn't had any money in it yet.

I need to make a business purchase, and want to see it come out of my business account for neatness. In order to do this, I'm intending to put some money into my business account from my personal account.

So my question is: what is the correct procedure for accounting for such a personal money transfer into my business?

I'm new to book keeping, but as I see it there are two ways money can come into the business - [1] any money it earns, and [2] any money that is put into it personally to give it a kick-start. With the latter, clearly I don't want to be paying tax on it, as it's not earnings.

I've chosen the book keeping software I'm going to use, and will need to know what category / description to use for such personal input!

Many thanks,

Nick

Hi Nick,

As the experts here will point out to you in more detail, all money you put into your business in the begining is called start up capital, which is treated exactly the same as if you were to borrow from the bank to start a business, the only difference is you can decide when you want to take it out and you do not need to pay monthly instalments on it regardless of whether your in profit or not. On your cashflow forecast it should be listed on there.

At the end of the year you can pay yourself that money back and then pay TAX on whats left after that. You can even write yourself a cheque sooner if business is really booming. How and when you decide to repay that money back to yourself is your choice, thats money you have already paid tax on and its the start up capital. the tax man isnt that ruthless lol

 

[Eagle]

You can't come in here that often, then.

I don't!

 

[MyAccountantOnline]

As the experts here will point out to you in more detail, all money you put into your business in the begining is called start up capital, which is treated exactly the same as if you were to borrow from the bank to start a business, the only difference is you can decide when you want to take it out and you do not need to pay monthly instalments on it regardless of whether your in profit or not. On your cashflow forecast it should be listed on there.

To clarify though - private monies paid into a soletraders account is capital introduced, bank loans aren't - they are liabilities/loans and will be shown separately.

At the end of the year you can pay yourself that money back and then pay TAX on whats left after that.

This suggests capital introduced reduces tax or you are taxed on money left which isnt the case - a soletrader pays tax on taxable income less allowable expenses.

 

[elaine@cheapaccounting]

you pay tax on profit

Profit = income less costs

Start up funds are accounted for differently depending on if the business is a sole trader or limited company.

If there are loans the treatment depends on if the business borrows the money (limited company) or the individual borrows the money.

Advice sought be taken on the exact circs for your business.

 

[Interimsolutions]

So, if for example someone worked for a few years and saved up 20k

set up as a soletrader and put 20k in his business account to buy stock and materials to start trading.

After 1 year he has a profit of 35k.

can he not deduct the 20k he put into the business before he started and pay tax on the remainder 15k?

or will he need to pay tax on the whole 35K?

Even though he's already paid tax on the 20k from previous employment.

 

[David Griffiths]

can he not deduct the 20k he put into the business before he started and pay tax on the remainder 15k?

No

or will he need to pay tax on the whole 35K?

yes

Even though he's already paid tax on the 20k from previous employment.

But the £20k isn't inlcuded in the £35k profits. I think that you may be struggling with an understanding of what is profit in a business

 

[elaine@cheapaccounting]

So, if for example someone worked for a few years and saved up 20k

set up as a soletrader and put 20k in his business account to buy stock and materials to start trading.

After 1 year he has a profit of 35k.

can he not deduct the 20k he put into the business before he started and pay tax on the remainder 15k?

or will he need to pay tax on the whole 35K?

Even though he's already paid tax on the 20k from previous employment.

If only!

Tax on £35k

Same as you pay interest on your savings which have already been taxed from your employment before you put them into your savings account.

 

[Interimsolutions]

I know exactly what profit is, Im trying to get you to break it down for the chap so he understands.

You and me both know that the 20k I used in the example will be repaid, but you cant take that out of the turnover as you would probably need to purchase more materials etc to continue trading for the rest of the year. If he will not be in profit that money will not be recovered, I'm trying to make you professionally explain to Nick that whatever he puts into the business will not get lost in the system, its all accounted for.

We have to encourage people to become selfemployed.

 

[Interimsolutions]

If only!

Tax on £35k

Same as you pay interest on your savings which have already been taxed from your employment before you put them into your savings account.

No, you do not get taxed on your savings, if that were the case there would be no savings left, tax is applied to the interest which is earnt on the savings,

 

[elaine@cheapaccounting]

I know exactly what profit is, Im trying to get you to break it down for the chap so he understands.

You and me both know that the 20k I used in the example will be repaid, but you cant take that out of the turnover as you would probably need to purchase more materials etc to continue trading for the rest of the year. If he will not be in profit that money will not be recovered, I'm trying to make you professionally explain to Nick that whatever he puts into the business will not get lost in the system, its all accounted for.

We have to encourage people to become selfemployed.

With respect I think we did professionally explain

 

[elaine@cheapaccounting]

If only!

Tax on £35k

Same as you pay interest on your savings which have already been taxed from your employment before you put them into your savings account.

should read ...


Tax on £35k

Same as you pay tax on the interest on your savings.

The savings have already been taxed when you earned them from your employment.

I think that explains that professionally.

 

[Interimsolutions]

should read ...


Tax on £35k

Same as you pay tax on the interest on your savings.

The savings have already been taxed when you earned them from your employment.

I think that explains that professionally.

Im pleased you have corrected that. That part is explained now with regards to tax on interest. Thank you for going through the trouble of re-explaining that.

 

[endlessroad]

Thank you, everyone, for your input...

I'm a little confused at the moment, as I'm inferring from some of the suggestions that if, for example, I put in £100 of my own money (which I've already paid tax on, of course), I won't be able to then take it out of the business again later without having to pay tax on it. Is this true?

Kind regards,

Nick

 

[Interimsolutions]

Here's a question for you Elain (if i may call you Elain)

Why is it that when people are considering selfemployment, majority are more concerned if they will be able to take out the money they invested into the business when they started, rather than market research? and Sitting with their accountant going through the cashflow forecast, and business plan?

In my humble opinion, if they give less priority to market research, they may never see their initial investment again. Can it be the folk at the local pub who divert their attention towards the less important aspect before starting up? I would rather pay an account 500/ a thousand or even 2 thousand and get advice and help before I invest in a new venture, rather than risking 20, 30 or 40 grand + without thorough market research and advice.

 

[MyAccountantOnline]

Thank you, everyone, for your input...

I'm a little confused at the moment, as I'm inferring from some of the suggestions that if, for example, I put in £100 of my own money (which I've already paid tax on, of course), I won't be able to then take it out of the business again later without having to pay tax on it. Is this true?

Kind regards,

Nick

Hi Nick

To clarify as a soletrader if you pay any private money (capital introduced) into your business account it isnt taxed, and when you take it out again it doesnt save tax/incur any tax charge - it has no effect on your tax liability at all.

You will pay tax only on business profits - that's your sales less business expenses.

Hope that helps

 

[MyAccountantOnline]

Here's a question for you Elain (if i may call you Elain)

Why is it that when people are considering selfemployment, majority are more concerned if they will be able to take out the money they invested into the business when they started, rather than market research? and Sitting with their accountant going through the cashflow forecast, and business plan?

In my humble opinion, if they give less priority to market research, they may never see their initial investment again. Can it be the folk at the local pub who divert their attention towards the less important aspect before starting up? I would rather pay an account 500/ a thousand or even 2 thousand and get advice and help before I invest in a new venture, rather than risking 20, 30 or 40 grand + without thorough market research and advice.

Might be best to start a new thread on this as its a little off topic

 

[Interimsolutions]

Thank you, everyone, for your input...

I'm a little confused at the moment, as I'm inferring from some of the suggestions that if, for example, I put in £100 of my own money (which I've already paid tax on, of course), I won't be able to then take it out of the business again later without having to pay tax on it. Is this true?

Kind regards,

Nick

No its not like that, I thought you would be a little confused, thats why I was trying in different ways to get the professionals to break it down in the most simplest ways possible so you would understand.

You need to go and sit down with your accountant, he or she will break it down for you, after all there is only so much they can explain for free lol. But your money doesnt end up in a black hole, think of it like an expense, if that helps, an expense not for you but for the business, meaning, you would get your money back before the business makes a profit. Does this make sense?

 

[endlessroad]

Thank you , Nicola J - that's what I thought!

Kind regards,

Nick

 

[Interimsolutions]

I thought the accountants might be feeling a little lonely in here, so gave them something else to comment on lol

 

[endlessroad]

Interimsolutions -

...your money doesnt end up in a black hole, think of it like an expense, if that helps, an expense not for you but for the business, meaning, you would get your money back before the business makes a profit. Does this make sense?

Yes, that makes sense, thank you!

Kind regards,

Nick

 

[MyAccountantOnline]

Thank you , Nicola J - that's what I thought!

Kind regards,

Nick

No problem - I think I'd be confused by so many of the postings too

 

[elaine@cheapaccounting]

I thought the accountants might be feeling a little lonely in here, so gave them something else to comment on lol

LOL ! At over 8,000 posts - I don't think that I am that lonely. BTW it is Elaine

 

[MyAccountantOnline]

I thought the accountants might be feeling a little lonely in here, so gave them something else to comment on lol

No I'm certainly not lonely

 

[Interimsolutions]

If there is one lesson Nick will not be forgetting so soon thats "how to account for personal funds into a sole trader business"

Your welcome Nick.

Your all welcome, untill the next time. I apolagise for spelling your name wrong Elaine.

 

[endlessroad]

If there is one lesson Nick will not be forgetting so soon thats "how to account for personal funds into a sole trader business"

Indeed - I'm glad we got that one sorted out and had a good natter at the same time!

Yet, I'm going to ramp it up a notch now with a related, but more technical, question...

Before my business bank account came into existence, a family member offered to give me some money to put into the business (which I now know to be "capital introduced")! With this money, I decided to make a purchase for my business. But because I didn't yet have an account, the family member simply put the purchase on their credit card on my behalf. This being the case, does it prevent me from specifying this purchase as an allowable expense for tax purposes (i.e. because the family member's gift of money never went into and out of my account)?

Bit more tricky, this one, I suspect!

Kind regards,

Nick

 

[elaine@cheapaccounting]

Nope - have a read of this .....

http://www.cheapaccounting.co.uk/blog/?p=315

Often a business incurs a few costs before it actually starts to trade.
We are often asked if this can be recorded in the accounts and set off against trading profits.
The costs can of course be claimed assuming that they are for the business.
The general rule is that the qualifying pre-trading expenditure should be treated as incurred on the first day that the business started to trade. ......

 

[MyAccountantOnline]

Indeed - I'm glad we got that one sorted out and had a good natter at the same time!

Yet, I'm going to ramp it up a notch now with a related, but more technical, question...

Before my business bank account came into existence, a family member offered to give me some money to put into the business (which I now know to be "capital introduced")! With this money, I decided to make a purchase for my business. But because I didn't yet have an account, the family member simply put the purchase on their credit card on my behalf. This being the case, does it prevent me from specifying this purchase as an allowable expense for tax purposes (i.e. because the family member's gift of money never went into and out of my account)?

Bit more tricky, this one, I suspect!

Kind regards,

Nick

No problem with that Nick - its something many, many newly self employed people do. Just record it in your records as having been paid on day one as Elaine mentioned. You can claim normal trading expenses for the business going back 7 years if necessary.

 

[endlessroad]

I suppose my worry is that this particular pre-trading expense could be shown to have been incurred by my parents (on whose credit card it was purchased), even though the purchase was indeed for my business, and even though ideally the money would have been transferred to me first for me to make the purchase directly (if I'd had the business account at that point).

On the HMRC site, it says "Relief under ICTA88/S401 in respect of pre-trading expenditure is only available to the person who incurred the expenditure and commences the trade."

This seems to suggest that I can't claim tax relief on this purchase, because technically it was incurred by my parents, even though it was a gift to me.

Kind regards,

Nick

 

[elaine@cheapaccounting]

Nick - your parents 'sell it to you'.

With respect - may I suggest that you stop worrying too much about this and get on with running the business.

 

[yackers1]

From your post I assume you are after the double entry?

First of account for the cash you transfer from your personal account to your business account. So, if you are transferring over £5,000. Debit the business bank account £5,000 and credit capital introduced £5,000.

Hope this is what you're after?