How to record capital contributions and withdrawals

In day-to-day business, it’s common for business owners to transfer money between their company account and personal account. These transactions include drawings (when money is taken out for personal use) and capital contributions (when personal funds or assets are injected into the business). Proper record-keeping ensures compliance with HMRC regulations and maintains accurate financial statements.

How to do an owner’s draw

For sole traders and partnerships, withdrawing money for personal use is called an owner’s draw. This is not classified as a business expense but instead reduces the owner’s equity in the business. In contrast, limited company owners cannot take an owner’s draw but must withdraw money through salary, dividends, or a director’s loan, each with specific tax implications.

It’s important to consider:

1. Transaction amount – the exact value of the withdrawal or contribution.
2. Account movement – which accounts the money is transferred between.

Depending on your business size and complexity, you can use single-entry bookkeeping (suitable for small businesses) or double-entry bookkeeping (recommended for more detailed financial records).

Methods of recording transactions

When transferring funds between personal and business accounts, you need to record the transactions correctly in the books.

Example of how to record an owner’s draw:

• Withdrawing cash (£50) from the business (Owner’s Draw):
  • Debit: Owner’s draw account £50
  • Credit: Cash register £50
• Depositing cash (£200) into the business:
  • Debit: Cash register £200
  • Credit: Owner’s capital contribution £200

Owner withdrawal journal entry

In double-entry bookkeeping, every owner’s draw must be recorded in a journal entry to reflect its impact on the financial statements.

Example

This journal entry records the withdrawal of £1,000 from the business by the owner. The owner’s draw reduces the equity of the business.

Owner draws on balance sheets

Unlike business expenses, owner’s draws do not appear on the Profit & Loss Statement. Instead, they are recorded in the equity section of the balance sheet, reducing the owner’s capital account.

Example

• If an owner takes £10,000 from the business as a draw, the equity account will decrease by £10,000, reflecting the reduction in available capital.

Owner’s Equity = Initial Capital + Contributions – Withdrawals (Owner’s Draw) + Net Profit/Loss

Recording non-cash withdrawals

If an owner withdraws a business asset (e.g., a product) for personal use, the withdrawal should be recorded at its market value, including VAT if applicable.

Example

Withdrawing a product valued at £120 (net price £100 + VAT £20):

• Debit: Owner’s draw £120
• Credit: Sales revenue £100
• Credit: VAT liability £20

Recording private usage of business assets

If a business asset (e.g., a company car) is used for personal purposes, it must be recorded and may be taxable.

The amount of tax owed on a company car depends on several factors. First, the P11D value of the vehicle, which represents the list price including VAT, delivery fees, and optional extras, plays a key role. Next, CO₂ emissions impact the tax rate, with higher-emission vehicles incurring higher charges. Finally, your income tax bracket (either 20% or 40%) determines the final tax amount you must pay.

To calculate company car tax, start by identifying the P11D value of your car. Then, multiply this value by the applicable company car tax band, which is based on the vehicle’s CO₂ emissions. Finally, take the resulting figure and multiply it by your income tax rate to determine the total amount of company car tax owed.

How to record capital contributions (non-cash assets)

If an owner contributes a personal asset (e.g., a computer) to the business, record the asset’s current market value as a capital contribution.

Example

A PC originally bought for £1,200 now valued at £800 is transferred to the business:

• Debit: Office Equipment (increase in business assets).
• Credit: Owner’s Capital Account (reflects the owner’s investment).

This ensures the asset is properly accounted for as business property.

VAT considerations

• If VAT was reclaimed on the asset originally, transfer it excluding VAT.
• If VAT was not reclaimed, and the business is VAT-registered, VAT may be claimed upon transfer.

Example (with VAT 20%):

Tax & depreciation

• The asset should be depreciated over time.
• Sole traders & partnerships: Recorded as a capital contribution with possible Capital Allowances.
• Limited companies: May go through a Director’s Loan Account (DLA) and qualify for Capital Allowances.

Please note the legal disclaimer for this article.