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• # 107156
• Mon 06 Apr 2015 09:54 AM

Hi

Sorry if this is a daft question...

If a client (sole trader) has put money into their business throughout the year to pay for bills etc and it totals to £5000 at the end of their tax year.

They have taken £10000 as drawings.

Can you state on their end of year as them only taking £5000 and the other £5,000 is repaying what they've put in?

Someone said I need to add the amount they've put in as sales and then deduct - is this correct?

Thanks

Angela 

• Angela Smith
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• # 107158
• Mon 06 Apr 2015 10:49 AM

Hi Angela

Capital introduced will not be used for bills. As they have taken 10000 for drawings you need to reduce the bank by 10000 and increase the bank by 5000 probably sales. The opposite entry will be capital 5000, and the drawings to reduce the income in the balance sheet. In a partnership drawings are deducted from partner current accounts. In sole trader they reduce the reserves in the balance sheet. I hope this helps

Kind Regard

Paula Welsh

• Hello all,
  
  i just noticed we have a forum, just poking around the members area.  My name is Paula welsh and I have been a member since 2005, starting with Associate member and now a full member

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• # 107160
• Mon 06 Apr 2015 11:08 AM

Hi Paula

many thanks for your reply. 

If the client has taken for example £1000 per month as drawings but some months needed to put back £500 cause he didn't earn enough to cover bills what do you class that as? I thought it would be capital introduced. 

Thanks

Angela

• Angela Smith
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• # 107162
• Mon 06 Apr 2015 01:44 PM

Sorry, I don't follow - "reduce the bank by 10,000 and increase the bank by 5,000 probably sales". I'm not sure what you mean by that. Do you think you could set out each double entry you are thinking of?

Thanks and Happy Easter!

Danya

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• # 107165
• Mon 06 Apr 2015 10:51 PM

Hi Angela,

The amounts the sole trader pays out of his personal money is treated as Capital Introduced.

At the year-end I always deduct the total capital introduced during the year from the drawings taken during the year.

This has nothing to do with sales or the bank.

Or you could just leave it and the next time the sole trader takes drawings deduct it from the capital introduced as they are only taking out what they have put in to the business.

Marilyn

• A clever person solves a problem.

  A wise person avoids it.

  Albert Enstein

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• # 107175
• Tue 07 Apr 2015 04:57 PM

I agree Maralyn, and I would account for it in the same way - absolutely nothing to do with sales at all.

• Anne P
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• # 107179
• Tue 07 Apr 2015 09:14 PM

Hi

thank you Marilyn and Paula. 

I understand completely now  

i appreciate your comments. 

Angela 

• Angela Smith
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• # 107246
• Sun 12 Apr 2015 07:20 AM

I would just like to add one further point to the discussion from both an educational bookkeeping view and also as an ex-practising member. 

If it can be proved that the income is returned drawings then the treatment to offset it against those drawings is fine. However, members should be sure that this is the case - how is the client living if all he or she is taking out is £1000 per month and returning £500 of the drawings by using them to fund business expenses? if there is an HMRC inspection they will look into the audit trail of the funds used to replenish the business. They will want to be sure that their living style can be supported by the business - is there another source of income such as a salary on which tax would have been deducted under PAYE? Is there other income to the family? Member should not just assume - it could very well be undeclared income which should then be entered as sales.

So both views could be considered to be valid - you just need to be very clear in your own mind and also in your source documents which is the valid choice. This is the sort of situation that is very difficult to teach and examine!!

Hope this helps

• Jacquie Mount

  Head of Technical Policy

  ICB

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• # 107247
• Sun 12 Apr 2015 09:36 AM

Hi Jacquie,

Yes I agree with you.

However, I did not wish to confuse Angela further and only answered the question she asked.

The rest is really common sense and as you say difficult to teach or examine.

We should always be aware of situations like this and that is why I make a point of knowing my clients home/family situations without coming over as being nosey!

Marilyn

• A clever person solves a problem.

  A wise person avoids it.

  Albert Enstein

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• # 107259
• Mon 13 Apr 2015 05:54 PM

Hi - well said. it is very fine dividing line between the two!!

• Jacquie Mount

  Head of Technical Policy

  ICB

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