Understanding Overdrawn Current Accounts: A Simple Guide

For many company directors and shareholders, the term "overdrawn current account or Drawings Account" can be confusing. Let's break it down in simple terms to help you understand why it's important.

 What is an Overdrawn Current Account?

 Think of an overdrawn current account like a loan from your company to you. It's not the same as a salary. When you take money from the company without it being officially recorded as a salary, it becomes a loan that you owe back to the company. This is important because it shows up as a debt on the company's balance sheet in the year-end Financial Statements.

 The shareholder current account is overdrawn at balance date when the amount withdrawn for personal use exceeds the amount introduced and the profit allocated to shareholders. An overdrawn current account incurs interest charges at specific rates deemed each year by the IRD.

Why Does This Matter?

 If your company ever faces financial trouble and goes into liquidation (meaning it can't pay its debts and has to close down), liquidators will look for ways to recover money. An overdrawn current account is one of the first things they target because it's easy to identify. They might even freeze your personal assets, like your home or bank accounts, to make sure they can get the money back.

A Real-Life Example:

 Imagine a director who had taken $400,000 from their company over several years without declaring it as a salary. When the company went into liquidation, the liquidators quickly moved to freeze the director's personal assets to ensure they could recover the money. This is a common approach and can be very stressful and costly.

 What Can You Do?

 To avoid these problems, it's important to get advice from us on ways to limit risks before any trouble arises. We can help you understand your current account and suggest ways to manage it better. For example, you might decide to officially declare the money as a salary, which could mean paying some extra tax but would prevent bigger issues down the line.

 In short, understanding and managing your overdrawn current account can save you a lot of hassle and protect your personal assets. It's always better to be informed and prepared!