Sole Trader - Mileage expenses recording

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anthony.brindle

09 Apr, 2014 03:22 PM

Hi there as a sole trader I have entered mileage allowance for business trips as indirect expenses under motor expenses and then on the other side against drawings, however I'm now wondering about how I actually take this out of drawings as the value of the drawings is going up and up. Do I simply make a withdrawal from the drawings to my personal bank account ?

Currently the amount caused by the motor expenses is sitting on the Drawings account as a liability on the balance sheet.

Equally I have entered some allowable expenses for "Use of Home" as office such as council tax relief but have account 1 set as indirect expense and account to set to a creditor which is the house hold bill account as that is where the council tax bills came out of, any help with these 2 points would be appreciated.

Thanks

  1. Support Staff 1 Posted by Admin on 10 Apr, 2014 12:41 PM

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    Hi Anthony,

    Do you use a dedicated bank account for your sole trader business or do you use your own personal bank account?

    I'm not as familiar with sole trader businesses as I am with corporations but I'll try to explain what I do and perhaps it will make some sense.

    It helps to think of the business as a separate person, with its own money (bank accounts, petty cash and so on). For my business I have a main bank account in the company name. This means I can use the reconciliation functions in Easy Books to check I've entered all the expenses, I have the correct amounts and I've entered them against the correct account. This is a big benefit to having a dedicated bank account for the business.

    I've created an account called "Personal Money" in the category Petty Cash. This is because it doesn't have statements but I can use it to keep track of money I spend out of my own pocket that is really for the business. It could be things like postage, train tickets for business meetings and so on. It can also include your motoring expenses. I enter motor expenses like this:

    Description: Slough to Bristol 100 miles @ 45p/mile
    Account 1: Personal Money
    Transaction Type: Out (Spent)
    Account 2: Motor (an indirect expense account)
    Amount: 45.00

    All my personal spending builds up in the "Personal Money" account as a negative figure. That's because the books are looking as it as an amount owned by the business. So any positive amount would be money the business has as an asset. Since it's negative we can think of it as money the business owes. In this case to you.

    To settle the business's debt to you, just transfer the money from the business bank account to the Personal Money account. This reduces the business's money in the bank and returns the Personal Money to zero assuming you pay out the whole amount.

    For the second part to do with your "Use of home as office". I would enter it in just the same way. That is, it's a transaction between your Personal Money and a suitable indirect expense account such as "Premises costs".

    The drawings account is to be used when you take money out of your business for yourself. This isn't the same as the business expense above.

    I would suggest checking with your accountant before you get too far down the road, as it'll be time well saved getting this right!

    All the best,

    Mathew

  2. 2 Posted by anthony.brindle on 10 Apr, 2014 03:49 PM

    anthony.brindle's Avatar

    Hi Matthew,

    I do agree the best way to think about the business is like a separate person as it will be easier (I think). Scenario is this

    1. Business Bank Account has been set-up, albeit I have simply used an old savings account and renamed it to the same as the business.

    2. Joint Bank Account with Wife is set-up, this account is really the account that all house hold bills are paid from and also the wives wages from her full-time job are received.

    I have set this account up as a creditor account so that whenever things are bought for the business from the Joint Bank Account I put these against the Creditor.

    3. As the House bills are already paid for through the Joint Bank Account I am entering the following for the Use of Home, which increases the liability to the Joint Bank Account.

    Account 1: Fixed Costs (Use of Home Container)
    Transaction Type: Purchase
    Description: Council Tax Relief 2013/14
    Account 2: Joint Bank Account (Creditor)
    Amount: £17.31

    4. I then when possible re-pay the Joint Bank Account as follows to reduce the liability and obviously reclaim the money owed to the household from the business.

    Account 1: Joint Bank Account
    Transaction Type: Repayment amount
    Description: Repay Joint Bank Account
    Account 2: Business Account
    Amount: £50

    5. For the Motor Expenses I have entered these as follows. This would increase the liability on the drawings account i.e. owed effectively to myself as I have in effect incurred the expenses and would at some point want them back.

    Account 1: Car Mileage - Team Meetings
    Transaction Type: Purchase
    Description: 22 miles - Area 11 Meeting
    Account 2: Drawings
    Amount: £9.90

    6. Then at some point when the business can afford it I am then making a personal drawing from the business to use for example going out for a day trip. This would then be entered like below which would reduce the total Liability on the Drawings Account.

    Account 1: Business Account
    Transaction Type: Out (Paid)
    Description: Personal Draw from Business
    Account 2: Drawings
    Amount: £50

    Would you say the above makes sense ?, I think it’s probably the same roughly as to what you are doing with the Personal Money account, maybe ?

    Regards
    Anthony

  3. Support Staff 3 Posted by Admin on 11 Apr, 2014 08:10 AM

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    Hi Anthony,

    Thank you for the plain and simple breakdown, I found it easy to follow along which saved me a great deal of time. I normally don't get involved in this because it's too hard to get to the bottom of what people are doing but in your case I think I have a good idea. You might still want to check with your accountant to make sure - I'm not a suitable advisor although I can help with questions about the app.

    Here is my recommendation though, for what it's worth.

    I suggest in step 5 you change Account 2 to match what you're doing in step 3, i.e. "Joint Bank Account (Creditor)". So I'm suggesting this:

    Account 1: Car Mileage - Team Meetings
    Transaction Type: Purchase
    Description: 22 miles - Area 11 Meeting
    Account 2: Joint Bank Account (Creditor)
    Amount: £9.90

    In step 6 you're taking money out of the business as income (not just paying back an expense) and I think you're doing it right. You'll see the balance on your Business Account reduce and you'll see the Drawings account reduce too. This is correct. You probably have a negative balance in your Drawings account, which is fine. It will get topped up from the Profit & Loss account when you use the Consolidate option at the end of your financial year. My method is the same as yours, although my Drawings account is called Dividends (being a limited company). I take dividends out the business just like you're taking income and I start each financial year with a zero balance in Dividends. So as the year goes on the balance goes more and more negative, although there is money in the other Equity accounts from previous year retained profit. On the last day of my financial year I move money from the Profit & Loss account to Dividends to zero the balance in the Dividends account (ready for the new year). Then I consolidate the year which moves the overall profit into the Profit & Loss account. (There are some more steps which I do because I like to keep the Profit & Loss account empty and so I move any residual amount over to Retained Profit. You don't need to, both the Profit & Loss and Retained Profit are equivalent, and so is your Drawings when it comes to it.)

    I hope that helps,

    Mathew

  4. 4 Posted by anthony.brindle on 11 Apr, 2014 11:13 AM

    anthony.brindle's Avatar

    Hi Mathew,

    thanks for the reply and help, 1 last thing when you mention

    > On the last day of my financial year I move money from the Profit & Loss account to Dividends to zero the balance in the Dividends account (ready for the new year). Then I consolidate the year which moves the overall profit into the Profit & Loss account.
    >

    In my case there was zero in the Net Worth / Capital Account "Profit and Loss” as I have only been doing this for 2 and a bit months, but in the Profit and Loss Report there is a profit figure (Happy at this point). but are you suggesting that I place a negative entry to the Profit and Loss account to the Drawings account to cover any personal drawings from my business in anticipation of consolidating i.e.

    Account 1: Drawings
    Transaction Type: Capital Increase
    Description: Transfer Yearly Profits to Drawings Account
    Account 2: Profit and Loss
    Amount: £50

    Once I Consolidate, the P&L account is then increased back to Zero or above if there is a residual amount. Pretty sure this is fine, then in this case like you do if I want to keep the P&L account zero I could move the residual amount over to the “Retained Profit” account.

    Not sure if there is any benefit of the final bit as like you state they are one of the same thing I think as I am a sole trader, just wondering what would look better ?

    As you are probably aware I do need to put aside a certain percentage for the Tax and NI when eventually the business looks like it’s going to go over the thresholds. I am planning to retain approx. 30% for this and maybe this is what I could use the retained profit for would you recommend a different approach for recording this i.e. making a provision somewhere in the accounts ?

    Appreciate all your support and patience, also agree that I need to check with the accountant. Just want to try and sort most things out to hopefully get him to rubber stamp what I’m doing so I can then move forward with more confidence.

    Regards
    Anthony

  5. Support Staff 5 Posted by Admin on 11 Apr, 2014 12:13 PM

    Admin's Avatar

    Hi Anthony,

    Yes, that's it exactly. Although you could of course just leave the Drawings account to go negative and just sort out the transfer from P&L account later. The benefit it that you'll be able to see how much you've taken out of the business (albeit displayed as a negative).

    Putting aside could be as simple as a repeating transaction between your P&L account and a new creditor account called "NI Contributions Due". Then when you pay the NI it's just a transaction between this one as your main bank account.

    Mathew

  6. 6 Posted by anthony.brindle on 11 Apr, 2014 12:18 PM

    anthony.brindle's Avatar

    Hi Mathew,

    You read my mind regarding the NI, as that’s exactly what I’ve just done.

    Again, many thanks for your support. I will leave you alone now, great product also.

    Much Appreciated and happy customer, Anthony

  7. Admin closed this discussion on 11 Apr, 2014 04:04 PM.

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