How to record capital contributions and withdrawals correctly

On a day to day basis, it’s normal for money to be transferred from a company account to the business owner’s personal account for private purposes. This is also referred to as a drawing. Alternatively, the owner may inject their own money into a company during the course of the business.

For small businesses (sole proprietors) and partnerships, these financial transactions do not pose a problem as long as they are correctly accounted for. If your bookkeeping isn’t in order, issues with the HMRC could arise.

Two things are important when it comes to recording the contributions or draws:

1. The value of the cash injection or draw
2. Which accounts the money was transferred to

You can also record sales and purchases at a time when cash has not yet been transferred. This is called accrual accounting.

Most company accounts will consist of:

• Asset account (includes a company’s cash accounts, inventory, property and things it owns; accounts receivable)
• Liability account (monies or items owed by the company to others; accounts payable)
• Equity account (claims made by the owner or investors)

When you’re balancing your business accounts, you want to make sure that your liabilities and equity equal your assets. As the business owner, you can record personal account balances either on the left (more withdrawals than deposits) or on the right (more deposits than withdrawals). The private accounts are thus either a burden or relief on equity.

To understand the correct bookkeeping procedure, we’ll explore the different options using examples. We’ll start with the simplest form:

If you don’t remove an item but instead use it privately, you should record this usage which may be tax-deductible up to a certain amount. This would apply, for example, when using the company car privately. In the UK, journeys with a company car to and from work are considered personal trips.

The amount of tax you need to pay for your company car when making private journeys depends on:

• The car’s P11d value
• Its CO2 emissions (the higher the emissions, the higher the tax)
• Your tax bracket (20 per cent or 40 per cent)

To work out how much company car tax you owe, the following calculation applies:

• Find the right P11d value of your car
• Multiply the P11d value by the correct company car tax band
• The resulting figure is your benefit-in-kind (BIK) rate
• Multiply the BIK rate by your income tax percentage

The result will be the amount in tax you own annually for a company car. To be made exempt from company car tax, you should not use it for private journeys. You can reduce your company car tax by getting a car that emits less CO2.

Alternatively, you can register it as a ‘pool car’ for multiple members of staff to share for business purposes.

Rare and short personal trips using a company car do not usually have to be recorded.

In our final example, let’s look at a capital contribution in the form of an asset and how these are accounted for. Let’s say you bought a PC a year ago which was primarily used by your child. However, they have now moved away to college and are no longer using the PC. You want to hand over the PC to your company and specify the acquisition cost as a partial tax-deductible contribution.

You originally paid £1,200 for the PC. The computer’s value has declined over time and is now worth £800. The PC would be recorded as follows:

Other operating and business equipment £800.00 in Private deposits £800.00

As long as you can justify that the computer is solely used for business purposes, it falls under capital expenditure.

Please note the legal disclaimer relating to this article.