A lot of small business owners I speak to find it hard to grasp what the director’s loan account is. There are lots to nuances to this so I am going to keep it as simple as possible.

So what is a director’s loan account?

If you’re a sole trader, your business isn’t a separate entity so any money you take from the business is classed as drawings and you can take out what money you choose. But when you run a Limited company, it is legally separate from its owners and shareholders.

The money you put in the business and take out the business, has to be tracked as if it was your most stingy friend, who chases you for that drink they bought you.

The director’s loan account tracks the money you’ve put in and taken out in the accounting period and will have a balance.

The balance can either mean the business owes you money or you owe the business money, which is called an over drawn directors loan balance. I might do another video in more detail, but you just need to know if you are taking money out the business, you owe the business money and there can be consequences of this.

If there’s enough profit, most of the time this balance can get cleared with dividends. It’s an important balance to track on your accounting system, because you can have a shock when it’s too late.

To find your director’s loan balance in either ask your accountant what it was at your year end and what it is currently. Or go to either the balance sheet report or trial balance as of today in your accounting software.

If you’re confused what your directors loan balance is and need more support than you’re getting from your current accountant, drop me a message with a few details about yourself and we can have a chat.