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Thread: Members loan account

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    Members loan account

    Can someone assist me pleasssse, I have to raise a 2.5 million interest free members loan account from the company to the member. This is a result of an audit finding and starting from the previous financial period.

    I have a set of of financial statements for the current period ready but just dont know how to incorporate the debt in the balance sheet. What contra account is to be used?

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    Site Caretaker Dave A's Avatar
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    Quote Originally Posted by vtnoracle View Post
    What contra account is to be used?
    That has me confused too. How was the loan originally captured?

    Also, what is the repayment period of the loan?
    The trouble with opportunity is it normally comes dressed up as work.

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    The Contra account depends on where the loan came from / why it currently exists.

    Eg: If paid from the bank account, the contra is obviously your bank account.
    If paid by another member, then their loan account is the contra.

    I gather your situation is more complicated, but your answer lies in its origins ... and "thin air" doesn't count

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    Quote Originally Posted by Dave A View Post
    That has me confused too. How was the loan originally captured?

    Also, what is the repayment period of the loan?

    the loan is payable on demand, depending on availability of cash. what happened is there are personal bank accounts of the member linked to the business account and there was more money going out than into the business account, and auditors decided that it should be treated as a fringe benefit and taxed.

    I know that the loan account should be raised a debtor on the balance sheet but i dont know what cotra account to use?

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    Site Caretaker Dave A's Avatar
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    In terms of the management accounts, tracking the value and movements in a member's loan account (other current asset or similar in this case) is ordinarily good enough.

    It's when it comes to the drafting of financial statements that things can get a bit dramatic. It has to be clearly reported as a transaction with, and balance owed by, a connected party and there'll have to be a fairly detailed note on the subject. Ordinarily your auditors will take care of that when they draft the final financial statements.

    May I also comment that in most cc scenarios this is a less-than-ideal situation. Loans to members can have some ugly consequences, let alone the "interest free" bit. Depends how significant 2.5 bar is in the overall situation, I guess.
    The trouble with opportunity is it normally comes dressed up as work.

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    Silver Member Petrichor's Avatar
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    Quote Originally Posted by Dave A View Post
    May I also comment that in most cc scenarios this is a less-than-ideal situation. Loans to members can have some ugly consequences, let alone the "interest free" bit.
    @Dave - would you mind elaborating on this? I also have a loan account in my CC and just want to make sure I am not doing something I am not supposed to be doing. I am planning to pay back a portion (25%) of the loan to myself before end of this financial year. Interest free as well.

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    Site Caretaker Dave A's Avatar
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    From a tax point of view, I'd prefer it if a tax fundi went into the specific possible tax effects, but I'd keep a wary eye on value extraction tax related issues.

    From a financing point of view, it's a bit of a double whammy. Banks may discount the value of the "asset" in the hands of the company, which will hammer total debt to equity ratios. And at the same time recognise the full liability in the hands of the member, reducing your nett capital worth, hammering your own total debt to equity ratios and value as surety.

    Then there's the possible consequences if there are other members/partners.

    Far cleaner if the member raises their own finance for their own stuff and leaves the cc out of it i.m.o.
    The trouble with opportunity is it normally comes dressed up as work.

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    Have to agree with Dave. From an investors or financier's view the loan to a member/shareholder will reduce the shareholder's equity in the company. This may make it difficult for the business to obtain working capital finance. Withdrawing cash funds from a business also has grave cash flow consequences affecting its operational effectiveness.

    On the other hand, if the owner/member/shareholder gave a loan to the company, it may be regarded as an investment or commitment to the well-being and future growth of the business.
    Excellence is not a skill; its an attitude...

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    Silver Member Petrichor's Avatar
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    Thank you for clarifying. In my case I gave the loan to the company and are now, after 2 years, starting to see the real benefits from the capital investment I made in the business back then.

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    Site Caretaker Dave A's Avatar
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    Quote Originally Posted by Petrichor View Post
    In my case I gave the loan to the company and are now, after 2 years, starting to see the real benefits from the capital investment I made in the business back then.
    There's a huge difference between giving the company a loan, and taking a loan from the company
    The trouble with opportunity is it normally comes dressed up as work.

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