Dividends and the Directors Loan Account

Directors Loan Account

This
is the part of the accounts that shows transactions between the company and
director it will show details of any money the director has loaned to the
company and payments when it’s repaid it will also show any money taken from the
company by the director that is not covered by wages, expenses or dividends as
the money.

At the year end, this should be either nil or a
debit balance. If it’s a credit balance it shows the director owes the company
money which may have tax consequences (this is covered in more detail in the
Corporation Tax Additional Module), also if the business was to have financial
difficulties this money would need repaying to the company.

If
sufficient profits are available (after deduction of all expenses including
corporation tax, depreciation etc.) then a dividend may need voting (assuming
the director is also a shareholder) or additional salary posted.

I’m
amazed the amount of company directors who use the business bank account like
their personal account, the money in the business is not the directors own
money and should be kept separate.


Dividend

A
Dividend is a way of distributing profit to a shareholder, most of our clients
will have one class of share and dividends need to be paid to all shareholders
directly proportional to their shareholding.

i.e.
if two shareholders hold the shares Mr Anyone has one share and Mrs Anyone has
two shares dividends must be voted by the shareholders giving Mrs Anyone twice
as much as Mr Anyone so if there is £30000 to pay in dividends and the
shareholders want to take it all then Mr Anyone should get £10000 and Mrs
Anyone should get £20000.

The
accounting entries for this are as follows (I’m assuming the dividend was paid
31st March and was paid from the company bank account)

The
payment from the Bank Account we know from Module 1 is a liability from the
Bank so it’s a Credit which, therefore, makes the Equity Dividend Transaction a
Debit.

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