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Accounting question for Uni :D

Discussion in 'Accounting, Tax & Legal' started by Qaz, 9th Sep, 2005.

  1. Qaz

    Qaz Active Member

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    "During the year he took $5000 cash from the business. He indicated he will repay this money to the business. By the end of the year, none of this money has been repaid."

    How should he account for this transaction? Justify your answer

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    I got this question in a university assignment. I am unsure whether the money taken out of the business would be considered a loan or drawings.

    Any thoughts Nick?
     
  2. Glebe

    Glebe Well-Known Member

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    I'm not an accountant, but I would have thought if you're drawing from your business then you don't intend on paying it back. If you do plan on paying it back, you are borrowing from your business.
     
  3. See Change

    See Change Well-Known Member

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    Loan , given that he has indicated that he will pay it back I would have thought it would be a loan. But I'm not an accountant or training to be one , so logic doesn't always come into these sorts of questions.

    Loan also gives more flexibility.

    See Change
     
  4. TryHard

    TryHard Well-Known Member

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    No idea but ...

    If its drawings, wouldn't he have to pay it to himself as a wage, pay the applicable tax ?

    Otherwise presumably the ATO would like to see the loan documentation and commercial terms, and some explanation why the business has not pursued the repayment due ? Meaning I guess he could come up with a loan agreement at 7% interest repayable over the next 12 months or something ?

    That was a long way to say No Idea :)
     
  5. Jenny

    Jenny Well-Known Member

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    OK I'll have a shot.


    If no interest has been paid, I would imagine it would be treated as drawings i.e. income and taxed accordingly.

    Is there a box of chocs or equiv. for the right answer. :)

    Jenny
     
  6. Jacque

    Jacque Team InvestEd

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    Where are you Nick? :)
     
  7. Rick

    Rick Well-Known Member

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    Wouldn't there have to be some form of documentation to state the terms under which the money was taken?

    If there isn't any "he" would have to declare it as income on his tax return and the business would account for it as wages?

    How did he "indicate" he would repay it and under what terms and conditions?

    Knowing, or should I say knowing nothing about accountancy this is probably right off the mark :rolleyes:
     
  8. NickM

    NickM Co-founder Staff Member

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    OK, I am here :p

    Assumptions :
    what structure is being used as the answer will vary
    Sole trader - drawings
    Company - directors loan - then it could be a deemed div subject to Div 7a iif not correctly documented blah blah blah - may covert to a salary or pay a dividend

    there is no real distinction in terms between a loan and drawings. The term is relevant depending on the structure in use

    let me know if i need to go back to my books !
    NO responsibility for failed assignments :p
    Good luck
    NickM