Shareholder Current Account: a Worked Example

In an owner-managed company the line between the owners' money and the company's is drawn by bookkeeping. Owners draw cash as they need it, the company pays the odd private bill, and the owners put money in when the business is short. All of it runs through one ledger account, and at year end the accountant credits it with whatever salary or dividend has been decided. The account is where the owners' real take from the business is recorded, which is why a lender reads it before it reads the remuneration line.

The balance tells the lender which way the money is owed. In credit, the company owes the owners: it is their money in the business, and unless it is postponed behind the bank it can often be withdrawn whenever they choose. Overdrawn, the owners owe the company, and the balance sits among the company's assets as a debt that is only as good as the owners' ability to pay it.

Each market's tax law leans on an overdrawn balance, because untaxed money lent to an owner looks like income. In New Zealand, Inland Revenue treats an overdrawn account as a loan from the company, and charging less than the prescribed or market rate of interest can give rise to fringe benefit tax or a dividend. In Australia, Division 7A can treat a private company's loan to a shareholder or associate as a dividend unless it is repaid or put on a complying written loan agreement by the company's lodgment day. In the UK, where the same account is usually called a director's loan account, a close company whose loan to a participator, such as a shareholder-director, is not repaid within nine months of its year end pays a tax charge on the outstanding amount: 33.75% for loans made from April 2022, 35.75% for loans made since 6 April 2026, reclaimable once it is repaid.

A signwriting and vehicle-wrap business in New Zealand, owned by two directors and constructed for this page like every figure in it, reports EBITDA of US$1.40m after booking US$240,000 of shareholder salaries. Its tax paid is US$180,000 and its bank debt costs US$600,000 a year in interest and principal. The current account for the year reads:

The owners took US$615,000 in cash and private costs against salaries of US$240,000. The other US$375,000 did not pass through the profit and loss account; it moved into the current account, and from there into the balance sheet as an asset. The lender recasts the cover:

The business is the same; the owners' real cost is now in the numbers. The lender also takes the US$315,000 out of tangible net worth unless it can see how it will be repaid, and asks whether the year-end plan is to clear it with a dividend. A dividend credited to the account settles the debt on paper, but no cash comes back into the company.

Owner drawings are the flow; the current account is the running balance the flows leave behind. A dividend is a distribution the company declares, subject in each market to company law tests of solvency or distributable profits; a drawing is cash taken first and accounted for later, and is a loan until something is credited against it. That difference matters to a lender because a dividend declared to clear an overdrawn account is itself a distribution the company must be able to afford.

The account is also a related-party balance, and is read beside the others: rent paid to the owners' property company, loans to a sister company, guarantees the company has given for the owners. In the UK, company accounts must disclose advances and credits to directors in the notes. Elsewhere, and in accounts prepared for tax rather than for readers, the lender may have to ask for the ledger itself.

DEFINED IN ONE PARAGRAPH → · CASH FLOW ANALYSIS FOR BUSINESS LENDING → · FINANCIAL REPORTING, READ BY A LENDER →

Overdrawn, it changes the cash flow the loan is sized on and the equity the bank believes is in the business. A lender may ask for a plan to reduce the balance, set a covenant or undertaking on drawings, or lean harder on the owners' personal guarantees, since the owners already owe the company. If the company fails, a liquidator can collect the balance from the owners as a debt owed to the company.

In credit, it is a question of rank. A large credit balance is owners' money the bank may be counting as support for the business, and it can leave as quickly as it came. Lenders commonly ask for it to be postponed by deed, so that it cannot be repaid while the bank is owed, and some then read it as close to equity. Either way, the movement in the account over three years is often the plainest record of how the owners treat the company's cash.