Accounting question

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13 years 3 months ago #17202 by eelcat
Accounting question was created by eelcat
I can't find my accounting text and have forgotten some of what I knew. Can anyone help with this question?

OH and I have a small business which we run as a partnership. Over the last couple of years we have introduced a largish amount of money from our own savings to set up the business and to pay various costs before we had revenue coming in. We also borrowed money from the bank. Now that the business is starting to earn revenue, though not enough to return a profit, (!) we want to retrieve some of this money, effectively lent to the business by us. In our last year's accounts, the accountant recorded a small amount as "distribution to owners" ($198) but as we didn't take any money out at all, I suspect that it was a fudge number to make everything work. This year we added more capital, so can I record it as introducing the net amount (with a side calculation to show this - for example capital introduced $500, less capital repaid $100, net capital introduced $400)? If what I am talking about is drawings, then is this the same as what the accountant called "distribution to owners"? It is then reflected in the bank account (a decrease) and equity (an equal decrease).

For all sorts of reasons we don't want to go back to our original accountant, and currently can't afford to go to a new one, with whom we will have to start again, so to speak. Everything else is fine, just this one issue that is confusing me to bits.

1 Border collie, 1 Huntaway, 2 Lhasa Apsos, Suffolk and arapawa ewe crosses, an Arapawa ram,an East Friesian ewe , 5 cats, 42 ducks , 1 rooster and 30 hens, 5 geese, 12 goats, 2 donkeys, 2 house cows, one heifer calf, one bull calf, 3 rabbits and lots and lots and lots of fruit trees...

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13 years 3 months ago #256383 by arnie.m
Replied by arnie.m on topic Accounting question
Distributioin to owners could be anything and may or may not be taxable in your hands.

Your private funds introduced are another matter and are a loan to the business and need to be recorded carefully as such, as you may be entitled to or want to have interest payed to you on the balance, depending on your other earnings (from other jobs, work etc). Any money paid back to yourselves needs to be put against the funds introduced as I know the odd accountant will treat it as earnings to you rather than repayment of a loan to the company. Clear enough or have I confused you more????:)

Just read your query again, you can repay money yourself but your partnership needs to remain solvent

arnie
88 Valley
Nelson

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13 years 3 months ago #256386 by organicltd
Replied by organicltd on topic Accounting question
In your annual accounts there should be a page with a list of figures called "current account"

this is what the business owes you as a shareholder.

Wine does not make you FAT it makes you LEAN...
....against tables, chairs, floors, walls and ugly people.

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13 years 3 months ago #256387 by eelcat
Replied by eelcat on topic Accounting question

organicltd;235145 wrote: In your annual accounts there should be a page with a list of figures called "current account"

this is what the business owes you as a shareholder.

The pages prepared by the accountant were Statment of Financial Performance, Statement of Changes in Partners' Capital, and Statement of Financial Position.

Arnie.M - I can't see any logic in our paying tax on the money that we remove - when I earned it in a previous life (!) I paid tax on it. I should not have to pay tax on it again now surely?

1 Border collie, 1 Huntaway, 2 Lhasa Apsos, Suffolk and arapawa ewe crosses, an Arapawa ram,an East Friesian ewe , 5 cats, 42 ducks , 1 rooster and 30 hens, 5 geese, 12 goats, 2 donkeys, 2 house cows, one heifer calf, one bull calf, 3 rabbits and lots and lots and lots of fruit trees...

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13 years 3 months ago #256398 by OakhengeFarm
Replied by OakhengeFarm on topic Accounting question
It's best to think with a split personality here. The partnership is separate from you personally. You loaned money to the partnership to get it going. It owes you money, possibly with interest. Once the partnership starts earning money of its own, it should repay that loan.

As far as the partnership books are concerned, the loan is a liability, and any interest paid on that loan is an expense.

As far as you personally are concerned, the loan repayments are not income, but simply a return of your own money, but any interest paid to you could be seen as income. Since you are not (I assume) in the business of loaning money, this is not your primary income, and is therefore not taxable.

Any profit made by the Partnership, after it has repaid its loans and interest, is THEN allocated to the partners (ie you again), and taxed accordingly.

Clear as mud??

11 acres (4 in QEII Covenanted native bush), 15 sheep, 2 beefies, large vege gardens and a goat, and still no dog!:(

Oh, and uncountable wild birds - including fantails, swallows, yellowhammers, morepork, magpies, hawks, pukekos, and even quaill, pheasants and rainbow lorikeets [:D][:D] Not to mention possums, hares, rabbits, rats...

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13 years 3 months ago #256420 by eelcat
Replied by eelcat on topic Accounting question

OakhengeFarm;235158 wrote: It's best to think with a split personality here. The partnership is separate from you personally. You loaned money to the partnership to get it going. It owes you money, possibly with interest. Once the partnership starts earning money of its own, it should repay that loan.

As far as the partnership books are concerned, the loan is a liability, and any interest paid on that loan is an expense.

As far as you personally are concerned, the loan repayments are not income, but simply a return of your own money, but any interest paid to you could be seen as income. Since you are not (I assume) in the business of loaning money, this is not your primary income, and is therefore not taxable.

Any profit made by the Partnership, after it has repaid its loans and interest, is THEN allocated to the partners (ie you again), and taxed accordingly.

Clear as mud??

This was exactly what I had originally thought, but the accountant didn't do it this way last time, which ws why I became confused. He was not from NZ (though the accountant we signed up with was) and much of what we told him got seriously lost in the translation. Thanks

1 Border collie, 1 Huntaway, 2 Lhasa Apsos, Suffolk and arapawa ewe crosses, an Arapawa ram,an East Friesian ewe , 5 cats, 42 ducks , 1 rooster and 30 hens, 5 geese, 12 goats, 2 donkeys, 2 house cows, one heifer calf, one bull calf, 3 rabbits and lots and lots and lots of fruit trees...

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13 years 3 months ago #256445 by 4trees
Replied by 4trees on topic Accounting question
Hi,We have done the same thing from time to time, we recorded it as a loan in the business books, and as loan repayment when we drew it out of the business. No GST or tax is payable. Cheers.

Cheers
http:treeandshrub.co.nz

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13 years 3 months ago #256505 by arnie.m
Replied by arnie.m on topic Accounting question
Eelcat

What I was trying to say and did not say very well, was that if your partnership gets to the stage where it is paying 33% tax on profits and your personal tax is at say 21% it is better to charge the P/Ship interest which becomes an expense and therefore less tax @33% and you pay a bit more @21% until you get near the next personal tax bracket.

Maybe still clear as mud[xx(]

arnie
88 Valley
Nelson

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13 years 3 months ago #256512 by eelcat
Replied by eelcat on topic Accounting question

arnie.m;235275 wrote: Eelcat

What I was trying to say and did not say very well, was that if your partnership gets to the stage where it is paying 33% tax on profits and your personal tax is at say 21% it is better to charge the P/Ship interest which becomes an expense and therefore less tax @33% and you pay a bit more @21% until you get near the next personal tax bracket.

Maybe still clear as mud[xx(]

Thanks - will bear that in mind

1 Border collie, 1 Huntaway, 2 Lhasa Apsos, Suffolk and arapawa ewe crosses, an Arapawa ram,an East Friesian ewe , 5 cats, 42 ducks , 1 rooster and 30 hens, 5 geese, 12 goats, 2 donkeys, 2 house cows, one heifer calf, one bull calf, 3 rabbits and lots and lots and lots of fruit trees...

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13 years 3 months ago #257853 by Murray
Replied by Murray on topic Accounting question
Sorry, but some of the advice here is wrong. A partnership is not a seperate entity from the partners. Any profits that the partnership makes is split between the partners in accordance with the partnership agreement, and then taxed at the marginal rate of the individual partners.
The distribution of $198 may simply have been a cost that wasn't a business expense (or the personal portion of an apportioned business expense).
Any cash that you take out can be described as you stated - funds intorduced less funds withdrawn. There is no tax consequence at all as the partnership is not a tax-paying entity and all partnership profits are accounted for by the individual partners irrespective of whether there has been any cash flowing between the parties or not.

Murray - Tuahiwi, Nth Canty
It is better to wear out than rust out - Bishop Richard Cumberland
Wiltshire sheep, hazelnuts, Araucana chooks and Dexter cattle

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13 years 3 months ago #257904 by Seaside
Replied by Seaside on topic Accounting question
I've been trying to get my head around this, but what Murray said has helped.

The way I see it is this. Bear in mind I am in no way a tax expert, in fact I use an accountant for my tax returns as my understanding is limited, so I could be completely wrong.

If you are wanting to classify the 'status' of the money you repaid from your partnership bank account into your personal bank account, then that is good book-keeping, in that it makes it easier for the IRD if/when they audit to work out whether a particular withdrawal from you partnership account is a business expense (ie money spent to produce your product or run your business) or drawings (money (or goods) withdrawn from your partnership account for personal use).

I see the transfer of money from your partnership to your personal account to repay money you lent yourself as drawings, not a business expense, and should be accounted for accordingly.

This is because the money you used from your personal account to buy things for the partnership would have been accounted for as a business expense in your tax return (regardless of where you found the money), and PAYE refunded if your partnership made a loss. Or, if you did not pay PAYE, you will have that expense as a credit if and when you do become liable for PAYE (ie you become an employee), or if and when the partnership starts making a profit. So, as Murray said, it makes no difference in terms of tax, and you should not claim the repayment of that 'loan' from the partnership to yourself as a business expense (in other words,it is not tax deductable).

Look at it like this. Say you earned $50,000 per year in your job and paid PAYE on that. Then you spent $10,000 one year on goods and services to set up or maintain your partnership business. When you do your tax return, instead of your income being $50,000, it will have the business expenses (of $10,000) deducted, so your income that year would be $40,000. So you'd only pay PAYE on $40,000 and you would get a refund from the IRD. If, in the years to come, you put the $10,000 back into your personal account, it cannot be counted as a business expense because it already HAS been in the year you got that refund.

It's a little more complex than that, as some expenses can be claimed in full, others work on depreciation of capital, but the above paragraph gives an idea of the principle.

If it was a limited liability company, it is most likely different (except if it was a LAQC, in which case the directors can claim a tax refund on the loss, so you couldn't double claim a business expense).

Must go now, my brain hurts.

Kids, beasts, and chillies in Swannanoa South.
www.farmaway.co.nz

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