Owners move money in and out of a small business all the time: a sole trader tops up the business account from savings, pays a supplier from a personal card, or transfers £1,500 to themselves at the end of the month. None of these is income or an expense of the business. They are movements in the owner’s stake, and they need their own accounts.
How you record them depends on the legal structure.
Sole traders and partnerships
For an unincorporated business, the business and the owner are the same legal person. The owner is not paid a salary; they take drawings from the profit, and the business owes them their capital.
Capital introduced
Money or assets the owner puts into the business: opening the business bank account with £5,000 of savings, transferring a personal laptop for business use, paying a business bill from a personal account.
| Transaction | Debit | Credit |
|---|---|---|
| Owner pays £5,000 into the business account | Bank £5,000 | Capital introduced £5,000 |
| Owner pays a £240 supplier invoice personally | Trade creditors £240 | Capital introduced £240 |
Drawings
Money or goods the owner takes out for personal use: transfers to a personal account, personal bills paid by the business, stock taken home.
| Transaction | Debit | Credit |
|---|---|---|
| Owner transfers £1,500 to a personal account | Drawings £1,500 | Bank £1,500 |
| Business card used for a family holiday, £900 | Drawings £900 | Business credit card £900 |
Drawings are not a business expense and do not reduce taxable profit. A sole trader pays income tax and Class 4 National Insurance on the profit of the business, whatever they took out. Posting drawings to “wages” or “sundry expenses” understates profit and is one of the errors HMRC looks for. For sole traders, how drawings and tax interact is covered in the sole trader tax guide.
Mixed personal and business spending
When one payment is partly personal, such as a phone contract used for both, post the business share to the expense account and the personal share to drawings. If you claim a business proportion of household costs, see claiming home office expenses.
Limited companies: directors are different
A limited company is a separate legal person. Its directors and shareholders cannot take “drawings”. Money a director takes out has to be one of:
- salary, through payroll;
- dividends, declared from distributable profits;
- expense reimbursements, for genuine business costs;
- a loan from the company, recorded on the director’s loan account.
Money a director puts in is normally a loan to the company, also recorded on the director’s loan account, unless shares are issued for it. An overdrawn director’s loan account can have tax consequences for both the company and the director; these are explained in the director’s loan account. Share capital is covered in equity and share capital in the chart of accounts.
Setting up the accounts in the chart
Set up the owner accounts in the capital or equity section of the balance sheet (or, for directors, in debtors or creditors), and give each owner their own set. Mixing partners’ or directors’ balances in one account makes it impossible to work out who owes what.
| Structure | Accounts per owner | What happens at year end |
|---|---|---|
| Sole trader | Capital account; Capital introduced; Drawings | Profit for the year and capital introduced are added to capital; drawings are deducted |
| Partnership | Capital account (fixed capital agreed in the partnership agreement); Current account; Drawings | Each partner’s profit share is credited to their current account; drawings are deducted |
| Limited company | Director’s loan account (one per director) | Balance reviewed; if overdrawn, cleared or reported as a loan to a director in the accounts |
A few practical rules:
- Name accounts by person, for example “Drawings – A. Patel” and “Drawings – S. Patel”, rather than numbering them.
- Keep capital introduced separate from drawings during the year, even though they net off in the capital account at year end. It makes the movement easy to explain.
- Partnerships: the split between fixed capital and current account should follow the partnership agreement. Profit is allocated by the agreed profit-sharing ratio; see equity and profit allocation.
- A director’s loan account can be in credit or debit. Set it up so it can carry either, and review the balance at least quarterly.
Changing structure
When a sole trader incorporates, the old capital account is closed and the business assets and liabilities pass to the new company, often in exchange for shares or a loan from the director. The transition has tax effects worth planning; see switching from sole trader to limited company.