Merilee asked:

Please explain the difference between Owners Loan (Liability) and Owners Contribution (Owners Equity). I purchase items on my personal Visa for my sole proprietorship. When I record these items, I debit the expense account and credit the Owners Loan account. I also pay for an RRSP from my business account and in that case credit the bank and debit the Owners Loan account. I always have a credit balance in the Owners Loan account so I consider the RRSP payments as Loan Payments. Is this OK?

Edward Favot answered:

For unincorporated business, Owners Equity is the difference between the business assets less any related liabilities. An owners loan can be categorized as an advance made to unincorporated business where a lending agreement may be in place. Any other loans by the proprietor to an unincorporated business forms part of his contributions or equity.

Items purchased by the owner on behalf of the proprietorship can be expenses in the business and the owner is credited for such purchases. The owner is given the benefit of the payment by the credit to the Owners Capital Account. The Owners Capital account can be repaid without any consequences, providing there is sufficient cash in the bank account.

To answer the second part of your question: a payment made from the business account that is non-business related, such as RRSP payments, must be charged back to the Owners Account as the payments were made on his behalf. This is appropriate providing the business did not incur any interest charges for such payments as the interest may not be deductible for tax purposes.

If you require additional information, feel free to contact me at 905-851-2233.

About the author

Edward Favot has X years of accounting experience prior to opening his small business accounting firm, Edward Favot Chartered Accountant located at 7007 Islington Avenue, Woodbridge.

 
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