What is a Shareholder Current Account? A Shareholder Current Account (SCA) is that confusing account on the company balance sheet that shows what money is owed to (or by) the shareholders of a company.
When a company is formed it has Shares issued to the shareholders – when the shareholders pay for the shares this shows as Share Capital in the Equity section of the Balance Sheet.
Other money or assets introduced by a shareholder are usually treated as an interest free loan in the SCA.
An SCA can be thought of as a bank account for each individual shareholder in the business. Money flows in and out. If you loaned the business some money, this flows in and if you withdraw or are repaid some money, it flows out.
Need to fine-tune your business? Contact the experienced and friendly team at Engine Room Chartered Accountants on 0800 236 446 for a no obligation chat.
Why Would a Shareholder Introduce Their Own Money?
A shareholder would usually introduce their own money into a business in its formative stages (or when funds were tight). In a privately owned company, it is common for a company to have small Share Capital (say $100) and additional money to fund the business is usually an advance from a shareholder's personal account.
When these transactions are recorded they are credited to the shareholder’s individual current account which means the company owes you the money. The credit balance is recorded as a Current Liability in the Balance Sheet (as the company owes the shareholder money).
If the company loans a shareholder cash this is recorded as a Current Asset in the Balance Sheet as the shareholder owes that money to the business.
Taking Drawings as a Shareholder
Business owners commonly misunderstand the concept of drawings.
Drawings comprise cash drawings, private expenses paid for by the company, tax paid on behalf of the shareholder.
Shareholders cannot take drawings out of a company of more than they have owing to them – otherwise the SCA becomes overdrawn. Under New Zealand tax law this is deemed an interest free loan (unless the company charges interest), and Fringe Benefit Tax is payable.
If the shareholder is not paid wages or a salary during the year, which are taxed at source (PAYE), they are usually allocated a shareholder salary from annual profits of the company.
The shareholder will be liable for tax on this allocation in their personal income tax return.
|A good SCA||A bad SCA|
Although drawings are cash that is taken from the business for personal use, they are not classed as wages. They are only wages if a salary is declared and paid from the business's profit.
If the company didn't make a profit then it cannot pay a salary and therefore you will (as a shareholder) possibly end up with an overdrawn current account.
An overdrawn current account is a problem because the business owner is using money the company needs to operate to pay for personal expenses. This nullifies the benefits of a Limited Liability Company, as the business owner can be called upon to repay the money to pay outstanding creditors.
Three Ways to Fix an Overdrawn Current Account
Wondering how to fix an overdrawn current account?
There are three ways:
1. Repay the loan or reduce drawings
2. Increase company profits so the shareholder can receive a higher salary
3. If the company has historic profits, it can declare a dividend. This is will be limited to any retained earnings and the business must be solvent before and after a dividend is declared.
Need more help with the Shareholder Current Account? Contact us here at Engine Room Chartered Accountants in Tauranga and Pukekohe.
Tauranga & Pukekohe Chartered Accountants
Is your business in need of fine-tuning? Are you looking for new ways to streamline your financial processes and become more efficient? At Engine Room Chartered Accountants Tauranga and Pukekohe we are a friendly team of professionals that are dedicated to seeing SMEs just like you thrive, grow, and succeed.
At Engine Room we help business owners understand the numbers and provide a roadmap so they can reach their business goals — faster.
Want to arrange a meeting? We have two offices in the fastest growing cities in New Zealand — Tauranga and Pukekohe.
Engine Room Chartered Accountants — Great Business Performance Starts Here.