In the accounts of a limited Company in the UK, a directors loan account is an account recording the transactions between the company and its director or directors. The transactions recorded are those that can be assigned a monetary value. So money put in the bank by the director will be posted to the directors loan account. On the other hand, the hours of intellectual work that directors pour into the company, conceptualising, incorporating, getting loans, designing that product, cannot be posted to the directors loan account unless income is recognised for the Director.
Its important to maintain individual loan accounts for each director, when there are multiple directors, at all times.In the event of disputes, or a request for interest charges, this becomes particularly important.
Most small limited companies start of with only the directors funds. These directors pour a lot of their financial , material , intellectual, emotional and time resources into getting their business of the ground. it is a good thing to record all these contributions as accurately as possible. A lot of this is handled in the directors loan account
It is common for directors not to draw their salary and leave it as a loan to the company, particularly where the directors are also the main share holders. Conversely, some directors take out more money than their salary, which can lead to a debit balance on the directors loan account.
Once dividends are declared, the directors can either draw the cash from the company’s accounts or leave part or all of their dividend in the company by way of a credit posting to the directors loan account.
Directors often draw out money from the company as they need it. Where the director has initially put the money in, by way of financing the company and a sufficient credit balance exists on the directors loan account, this is not a problem.
However, companies act prohibits directors from taking loans from the company they run, and they must pay back any overdrawn balance. There are tax implications, to begin with, if the overdrawn balance is outstanding 9 months after the year end, the company may have to pay tax on the loan. Further more, the loan may have to be reported as income in a tax return for the director
in the event that a company is to be wound up, the creditors of the company are entitled to claw back any overdrawn directors loan account.Where the company is dissolved , a credit balance directors loan account ranks behind secured creditors, creditors, and others, but ahead of the shareholders.