How to record money going between a limited company and one of its directors (or employees).
It's important to remember these options are also available for non-director employees, but I'll use the term "director" to cover everyone in the example on this page.
The only kind of user for whom you can't record money paid to or received from, is an accountant user.
Owners of non-incorporated businesses (i.e. sole traders or partners) have different options.
Money taken out of the company by the director
There are only three ways this can happen.
One is that the company pays the director a salary. In FreeAgent, this bank transaction would be explained as Money Paid to User, choose the director from the list, and then give the reason as Net Salary and Bonuses.
Please note this only explains the payment of the money, not the cost to the company, so payments entered this way won't show up on your profit and loss account. The cost needs to be entered by way of the Payroll screen or by means of journal entries.
The second way is for the company to pay the director a dividend, if he or she is also a shareholder in the company. In this case the reason for the payment is 'Dividend'.
3. Pay back money owed
The third way is for the company to pay the director back money it owes to the director. This might be for out-of-pocket expenses that have been recorded in FreeAgent, in which case the reason is'Expense Payment'.
Or it might be a different kind of payback, such as a historic loan made by the director to the company which is now being repaid. In that case, the reason would be 'Payment from Director Loan Account'
What are the other reasons in FreeAgent?
1. Smart User Payment
Smart User Payment can be very useful indeed. If the company has paid you a sum which is partly salary owed, partly expenses repaid and the balance, if any, is a dividend, then make sure your salary and expenses have been entered into FreeAgent correctly and use Smart User Payment as the reason for the lump sum payment.
FreeAgent will break the payment down into its components, so will show part as salary paid, part as expenses repaid, and the rest as a dividend. Our dividend FAQ article will help you make sure you don't declare an illegal dividend if you declare dividends using Smart User Payment.
2. Benefit in Kind
Benefit in Kind would be if the company was paying for something that's going to attract a taxable or NICable benefit.
Money put into the company by the director
This would be Money Received from User.
There are two options for this.
1. Money lent by the director
If the director is lending money to the company, then the reason for that would be Payment to Director Loan Account.
2. The director buys shares
If he or she is buying shares in the company, it would be Share Capital Introduced.
If the shares were bought from the company for more than their par value, you'll need to split the transaction and post the par value as above, and then post the premium value as Other Money In > Share Premium.
So there are several different reasons for money going in and out of the company to or from a director. Make sure you choose the right one, because choosing the wrong one can result in tax problems. If you're not sure, ask your accountant, or email us on firstname.lastname@example.org