Transferring transactions from personal to business: shows as credit on director's loan account

Andorin

Hi all,

When I started my business I spent the first few weeks paying for things using my personal debt card: this has made filing our first years accounts good fun. I'm struggling a little with understanding how to handle this in Wave.

I'll explain here how I'm trying to do this currently:
(1) I've setup a personal account and a business account.
(2) I photograph a receipt using the Waves app and I file the receipt to my personal account
(3) Using the transactions page for my personal account, I transfer the receipt to an expense category (i.e. Professional fees) in my business account

My expectation was that this should then appear as a debt against the 'Owner's Investment and Drawings' account for my business (indicating that the business is now in debt to the director for the costs associated with the receipt). Instead when I go to Reports-->Balance Sheet-->'Owner's Investment and Drawings' it appears as a credit.

To make it appear as a debt I have to reverse the direction of the cost (i.e. if the cost associated with the receipt is £300 then I have to reverse it to -£300). While this then makes the 'Owner's Investment and Drawings' account make sense, the transaction no longer registers as a proper cost in the expenses category... and it just seems bizarre to have to do this.

Am I misunderstanding something? Have I done something wrong? Would be brilliant if someone could help me here.

Thanks

Alexia

Hi, @Andorin.

"Owner's Investments/Drawings" represents money that the business owner invests in the company or takes out for themselves. That transaction wouldn't be an expense to you business, since it was paid by the owner with no intention of it being repaid. To handle this as a loan, you'll have to create a liability account named "Director's Loan" instead.

The easiest way to handle this is to treat it as a credit card, that way you can use it as a payments account to pay for bills and receipts, and keep track of the balance easily from the transactions page. When you want to repay that amount, just make a transfer transaction from your bank account to that credit card.

Andorin

Hi Alexia,

Thanks for getting back to me. I'm a little confused now though: my understanding was that "Owner's Investments/Drawings" is the director's loan account. When I've transferred money into the business I've annotated it as going into a 'Directors Loan' income category in the "Owner's Investments/Drawings" equity account. Is that not correct?

Thanks

Alexia

Hi, @Andorin.

It isn't. Owner's Investment/Drawings represents money that invested into your business from your pocket, not as a loan, but has an injection of funds. A loan would be a liability account, like any other debts. That way, it'll be calculated accurately on your balance sheet.

Andorin

Gotcha, I think I've got it setup correctly the way you suggest now, so thanks for that.

It was this post on this forum btw that got me thinking the Owner's Investment/Drawings was director's loan account: https://community.waveapps.com/discussion/349/managing-a-loan-between-a-personal-and-business-account. Might we worth adding an addendum there.

For future reference of any readers here's what I'm now doing. I created a 'Director's Loan' credit card under liabilities.

(1) Director transfers money into the company as a director's loan
- Find the transaction representing money coming into the business bank account...
* Denote it as unclassified income [Category] to business bank [Account]
- Create a new expense transaction for the same amount on the same date:
* Denote it as unclassified expense [Category] from [Director's Loan] Liabilities Account
- Select both the expense and income transactions, then click 'Transfer'
- On the balance sheet, it now appears as a credit in the Directors Loan account (and thus as a liability for the company)

(2) Director paid for something for the company (which the company is now liable for having to pay back) and the receipt has been filed
- Just submit the receipt under a normal expense category coming from the Director's Loan liabilities account
- On the balance sheet, it now appears as a credit in the Directors Loan account (and thus as a liability for the company)
- If you want to keep track of which personal bank account it came from, just add this as a note

Alexia

Hi, @Andorin.

That sounds perfect to me!

There are a few ways to handle transactions like this one in Wave, it ultimately comes down to what makes the most sense to you. I like this method of handling a loan from the business owner as separate from Owner's Investment since I find it simpler to keep track of the amounts owed, versus amounts invested in the business without intentions to get repaid.

Andorin

Thanks for confirming!

Alexia

Hi, @Andorin.

I've been talking to some colleagues about this, as well as thinking about it more while answering a similar question elsewhere. The method I suggested isn't wrong, but using Owner's Investments/Drawings as you outlined first might be less work in the long run, and it's also a more standard way to handle this.

To answer your very first question, Owner's Investment/Drawings acts like a liability account when it comes to credit (balance goes up) and debit (balance goes down), which is why the signs appeared as they did. In this context, a positive number would be the amount the business owner is owed (or the amount that was invested in the business).

In the end, you can use whichever method is best suited to your business, but I had a bit more information to share, so I thought I would.