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Director's drawing

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cutejesey
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Director's drawing

Postby cutejesey » Thu, 16 Mar 2017 9:52 am

I'm the director cum shareholder for he company. Just check how to account for director's drawing? Can I just prepare the director resolution and resolved it as company expenses?

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Strong Eagle
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Re: Director's drawing

Postby Strong Eagle » Thu, 16 Mar 2017 11:58 am

You can receive compensation in one of three ways. You can pay yourself a salary. This will be set by a directors resolution at an AGM/EGM. If you pay a salary, it is subject to CPF and personal income tax.

You can pay a director's fee, again, subject to a AGM/EGM resolution. As with salary, your AGM/EGM resolution can specify one time or ongoing. Directors fees are subject to income tax but not to CPF.

You can pay yourself a director's bonus, again through an AGM/EGM resolution. Bonuses are treated as salary and subject to both income tax and CPF, as applicable.

Salaries, bonuses, and directors fees are all expense items.

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Re: Director's drawing

Postby cutejesey » Fri, 17 Mar 2017 6:13 pm

Currently this drawings sit in balance sheet, should I declare dividend to offset instead? Will it tax in personal income tax?


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Re: Director's drawing

Postby Strong Eagle » Mon, 20 Mar 2017 10:34 pm

cutejesey wrote:Currently this drawings sit in balance sheet, should I declare dividend to offset instead? Will it tax in personal income tax?


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I don't understand this line: "Currently this drawings sit in balance sheet".

Here is how things are supposed to work. Let's say that at a EGM/AGM you declare a directors fee of $2,000 to be paid effective March 15.

If you have cash in the bank to pay the directors fee, you debit an expense account on your P&L called "Directors Fees Paid", and you credit you Cash account on the balance sheet.

If you don't have the cash to pay the directors fees, then you still debit the "Directors Fees Paid" expense account but you must then credit a Liability account on your balance sheet, "Directors Fees Payable". When you do get the cash to actually pay the directors fees, you debit your Directors Fees payable account and credit cash.

Is this what you are talking about with "drawings sit in balance sheet"? Note that directors fees, salaries, and bonuses are all taxable at the time they are to be paid, regardless of whether the director actually gets cash or not.

You cannot "offset" salary owed with dividends if you have a liability account as in the example above. If you wanted to pay yourself dividends instead of a salary or fees, then you would file a document in your company's minutes stating the you relinquish all claims to salaries or fees payable to you.

Once that is filed, you then debit the Directors Fees Payable account and you credit Other Income.

Now you are free to pay dividends. Paying dividends means that you have cash in the bank; further that you will be paying dividends out of retained earnings... it is illegal to pay dividends out of paid up capital.

To pay the dividends, you need to make a couple of balance sheet entries. Let's start with a real simple balance sheet.

Assets
Cash in bank: $5,000

Liabilities
Accounts Payable: $1,000

Net Worth
Paid up capital: $1,000
Retained earnings: $3,000
Dividends paid: $0
Total net worth: $4,000

Total liabilities and net worth: $5,000

Since you have $3,000 in retained earnings you could pay yourself as much as $3,000 in dividends. Let's say you pay yourself $2,000 in dividends. Then you would credit Cash for $2,000 and debit "Dividends Paid" for $2,000.

You can see that once you take the cash out in the form of dividends, you now have $3,000 in assets, all cash, and your total net worth account becomes $2,000.

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Re: Director's drawing

Postby cutejesey » Tue, 21 Mar 2017 1:00 am

Thank you for detailed explanation Strong Eagle


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