There are several ways to record “out-of-pocket” expenses for the owner of a business on your books. How you do this depends of what type of business organization is being used. For example: Sole proprietor; Partnership; or Corporation.
Sole Proprietor
Choice One: Write a reimbursement check to yourself, code it to the appropriate expense categories.
Choice Two: Write a general journal entry debiting the appropriate expense accounts and crediting the Owner’s Draw account.
If you have been taking personal draws (debiting Owner’s Draw) then it only makes sense that when you spend your personal funds for business expenses you should credit (offset) the Owner’s Draw account.
Partnership
Choice One: When the partner turns in receipts for business purchases made from personal funds, write a check to the partner and code the check to the appropriate expense accounts.
Choice Two: A working partner receives money for services rendered to the partnership through an account called, “Guaranteed Payments“. If the partner uses personal funds for business purchases and turns in receipts, write a general journal entry that debits the expenses and credits that partner’s guaranteed payments account.
All you are doing is “netting“ increases and decreases to the partner’s account.
Note: You must include in the Partnership Agreement that it is okay to reimburse a partner for out-of-pocket expenses, otherwise those expenses are not deductible on the partnership tax return.
Corporation
Choice One: Reimbuse the officer/stockholder for out-of-pocket expenses by writing a check and coding the appropriate expense accounts.
Choice Two: Write a general journal entry debiting the out-of-pocket expenses and crediting the Officer Advance account.
In a corporation, there is no “draw“ account for officer/stockholders because they must receive compensation through a formal payroll system. Often, in a business that has a single officer/stockholder, that person writes checks to him or herself on the fly. He/she doesn’t want to wait for payday. In order to accomodate this practice, you can use an account called “Officer Advance”. When payday rolls around, subtract the advances from officer/stockholder’s paycheck. Or, better yet, wait until the end of the year to do it. It might be best to do it at the end of the year, because any out-of-pocket expenses can be recorded to offset the advances taken.
If, at the end of the year, there is a credit balance in the Officer Advance account, simply write a reimbursement check to the officer/stockholder. If there is a debit balance that is greater than the regular payroll net check, then gross up the amount of the excess advance and add it into the last payroll of the year. To “gross up” a check, means that you know what the net amount is, but you must figure out the gross amount in such a way that when the payroll taxes are subtracted from the gross amount, the net amount comes out to the amount the individual has already received.
Avoid using Stockholder Loans for Due To or Due From Stockholder transactions. Shareholder Loans should only be used for real loans that have a note instrument, an interest rate assigned, and regular payments made.
Keep it Simple
I am a sole proprietor. At the end of the day, I may have three or four receipts all crumpled up in my pockets. Usually, I’m not in the mood to sit down and enter these into my books. I have an accordian file, organized by month that I accumulate those receipts into. At the end of the year, I sort them out by category, and staple a calculator tape to the stack with the total. When I write my year end general journal entries, I include all those totals. I debit the expense accounts and credit the Owner’s Draw account.
If you belong to a larger organization you will probably want to journal your out-of-pocket expenses monthly.
Read my article titled, “Recording Credit Card Expenses on Your Books”, in the articles section of this blog. It tells you how to record credit card charges when using a combination of business and personal transactions.
John Day
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