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How should you treat non-business related expenses?



Whether you're making payments out of the company account to pay down a personal loan, or to pay for a subscription service for your kids, or to pay your personal taxes, that activity is unrelated to your business. Which means you shouldn't record them as expenses. So, how should you record these transactions? It depends!


Treatment 1: Funds will be reimbursed to the company

If the money will be repaid at some point, hopefully within a year, you should record each transaction to a note receivable (asset) account.


Payment of personal taxes:


Account Debit (Credit)

Cash $(15,000)

Note Receivable- Member/Shareholder 15,000


This essentially acts as an "I owe you" to the company, until you pay it off.


Treatment 2: Funds will not reimbursed to the company

If the money will not be repaid, you should record each transaction to a draw/distribution account.


Payment of personal taxes:


Account Debit (Credit)

Cash $(15,000)

Draw/Distribution 15,000


The effect of this entry is as if you went and drew money out the company account and paid taxes out of your personal bank account. It's your money at that point.


Obviously one scenario looks better than the other in terms of its effect on the balance sheet. In treatment 1, you reduce one asset but increase another. In treatment 2, you reduce one asset but decrease equity. However, depending on the overall health of your balance sheet, that might not matter for bonding purposes. Your underwriter may treat both scenarios as the same thing. For accounting purposes, you should just decide whether it's likely that the funds will be reimbursed. Then you'll know which route you should take.


It's important to note that neither scenario effects the income statement which is the goal. It all stays on the balance sheet.


Thank you!


-Ara


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