Proper Accounting for Business Owner Depositing Personal Money Into Business Checking Account
Transactions between a business owner and her company must be accounted for properly for many reasons. To accurately record how much money the company owes the owner or vice versa, every transfer of cash or transaction must be reported. The IRS is also interested in transactions between companies and their owners in order to make sure that the correct amount of tax is being paid. The method used to report these transactions depends on the legal structure of the company.
There are several common transactions that can occur between a company and its owners. The smaller the company, the more likely the owners are to buy things on behalf of the company, borrow money temporarily from the company or put more personal funds into it. In a corporation, a separate liability account is set up for the net funds owed to the owners (shareholders). This Due to Shareholder account will rise and fall with the transfer of cash and the amounts owing between the two. For example, if the owner deposits personal funds into the company's bank account, the entry would be a debit to cash and a credit to Due to Shareholder, reflecting the liability to the owner. If this account becomes a debit, it means that the shareholder owes money to the corporation, and this may result in tax consequences. In a partnership or a sole proprietorship, money owed to and by the owners increases or decreases their equity accounts, rather than a Due to Shareholder account.
If an owner invests more money into his company, it is considered a long-term investment. In a corporation, it is recorded in a section of the balance sheet called Capital Contributions, similar to Share Capital. There are several possible tax consequences to withdrawing capital contributions and an experienced CPA should be consulted prior to distributing those funds. A cash injection into a partnership or sole proprietorship results in an increase in the owner's equity account. In a sole proprietorship, there will be only one equity account. In a partnership, capital injections must be recorded in the correct partner's equity account. Each partner's equity account may be different depending on how much they own of the partnership, how much money they have contributed over the life of the company, and how much they have withdrawn.
Personal expenses of a business owner may be paid for through the business. If the expense has no legitimate business purpose, it represents money that the business owner owes the company. These types of transactions should be infrequent and should be paid back quickly. The IRS audits business activity to ensure that the owners are not getting benefits from the company that are not being taxed. If the net transaction activity between the owners and the company is in a debit position and cannot be paid back in the near future, a tax accountant can help manage the tax consequences.
These are the most common types of transactions between a business and its owner, especially for small businesses. The owner may be out doing personal errands and pick up a few things for the business or may want to use a personal credit card to buy business supplies to get credit card miles. The company owes the owner for any business expenses paid personally. The original transaction and the repayment should be clearly accounted for so that it does not appear as if the company is paying the owner a salary.