Pay for a Business Expense out of Own Pocket

There will probably be times when you have to pick up the tab for a business expense. There may be no funds in the business account, or you might have forgotten the business credit card at home when you went out to the store.

Because these transactions do not appear in the business bank account, it is easy to forget them; and in fact, I see this happen a lot. There are two really good reasons why you need to pay attention and track these expenses. First, it's money that the company owes you tax free. You do not have to pay tax on expense reimbursements. Second, the company still gets to deduct these expenses on the tax return, even though you paid them out of your own pocket. Think of it this way: for every receipt worth one dollar that you don't claim but leave sitting in your pocket or purse, you have thrown away at least 25 cents. Claim the expense. Get the deduction.

The accounting for this type of transaction looks like this:

            DR     Office expense                      $100

            DR     Retail tax liability                      7

            CR Shareholder loan                                    $107

       

It is identical to the transaction you would record if you bought the item out of the business account, except you're crediting the shareholder loan instead of cash. Make sure that you keep the invoice or receipt the same way you would for any other business expense. You have simply paid for it out of your pocket instead of out of the bank.

The Company Pays for a Personal Expense

This is the opposite of the pay business expense out of your own pocket. You may be short of personal funds and need to use company funds. It's important to track the business cash outlay, but you want to make sure that you are not expensing the item in the books of the business, because the expense is not business related.

The accounting looks like this:

DR Shareholder loan

CR Cash

Notice that you ignore the tax component of the transaction as well. The tax paid on personal expenses is not recoverable. This transaction simply says that money went out of the company and that the shareholder owes the company for it.