Overdrawn Director’s Loan Accounts Explained From Head To Toe
johnmiller3413 January 18, 2022Almost every business has a director’s loan account. You might be wondering what it is? It’s a transaction account that contains two parties: the company & directors. When the director withdraws the money from the company, then it shifts to a debit side of his/her loan account. When funds are introduced, they are recorded on the credit side of their loan account. Overdrawn director’s loan accounts are a threat as you technically owe that money to the enterprise. Therefore, you have to refill the loan account balance with the company’s year-end.
Below you can count on the options & strategies if it’s an overdrawn loan account.
How Do Overdrawn Loan Accounts Exist?
Usually, no organization cannot pay dividends from the profits they haven’t earned yet. In such a scenario, businesses use the company’s wealth and make the payments. The transactions are recorded in the individual director’s loan account. Of course, the payment is technically not a dividend. That’s why it accumulates as a debit balance in the company’s books. Therefore, it gives rise to overdrawn director’s loan accounts as directors owe the organizations that value.
Now you might be wondering how it will be repaid? It will be paid back by declaring the dividends at year-end despite making actual cash payments. You have the idea how the issue becomes severe when you are not able to drive profits at year-end & cover the balance which you have paid through the loan account.
Can Companies Write Off The Balance Of An Overdrawn Account?
If you are in this situation, the first thing is to calm yourself and don’t take any stupid action. Firstly, you cannot remove the outstanding balancing as it’s considered to be illegal. When it comes to large-scale organizations, then shareholders can agree to write off the balance over £10,000. However, it’s agreed when the particular director’s salary level is set for the upcoming year.
Legal Ways To Write Off Director’s Loan Account
Below are some recommended options which one can proceed with:
- When you claim it against the expenses, you have made it for the business.
- When you have any reimbursements.
- Write-off can be done as a bonus or dividend. But keep in mind that it’s not possible if your business is in a loss-making condition.
When The Director Faces The Worst Scenario
When the loan account is overdrawn, it automatically creates stress in the mind. Many cannot sleep at night with the acute financial pressure on their head. However, as discussed above, don’t panic and always look for a better solution.
Some situations become challenging, and no matter how much you try to resolve them, things get worse. Similarly, in an overdrawn director’s loan account, the worst situation is liquidation. This means when the director(s) couldn’t pay off the balance.
At that time, you need to adjust your assets to repay the debt. Even it’s suggested to look for professional guidance as they can give you the way to come out from this unbreakable financial anxiety.
Try to consider your director’s loan accounts seriously; otherwise, you can end up with a lot of trouble.
