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Creating a Due To/From Account

We all know to keep our business/personal finances separate. But if you take an "owner's draw," or write off a portion of your home office, then you're mixing them. A "Due To/From" account is a great solution.
Written Feb 11, 2010, read 15567 times since then.
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Everyone knows the rule of small business financials - keep your business and personal finances separate. But if you ever take an "owner's draw" from your business, deposit emergency cash into the business checking, reimburse yourself for the printer paper you bought at the grocery store, or "write off" a portion of your home office, then you're mixing the two. A simple "Due to/from" account in your accounting software is a fool-proof way to keep track of all of these!

This general ledger account in your accounting software's Chart of Accounts can be used for sole proprietorships, partnership, LLCs and S-Corporations. (I've owned/operated all four types). It's particularly valueable for unmarried business partners who want to keep track of who's contributed what, who's withdrawn what, and who needs to be reimbursed how much.

Start by creating an 'Other Current Liability' account called "Due To/From Owner". If you have more than one business owner, create two - such as: "Due To/From Dan" and a "Due To/From Lara". You will use these accounts for the following instances: (outlined in detail below):

• Owner's draw (also known as "Member Distribution" in an LLC)
• Owner contributions
• Business purchases made with personal funds
• Personal purchases made with business funds
• Recording company credit card transactions
• Reimbursing the owner for businesse expenses (like mileage, a portion of the utilities for a home office, the designated fax line, etc.)

When the following events occur, create a debit/credit general ledger entry into the Due To/From and a corresponding debit/credit entry in the appropriate G/L Account (i.e. Checking, Office Supplies, Mileage, etc.)

Owner's draw

No matter how diligent you are about not treating the petty cash box as your own, you may be dashing out to meet friends, and need to take $100 from the company cash box. Record these in the Due To/From account in the following way:

Account: Due To/From
Debit (decrease): $100
Memo: "took $100 cash"
Vendor Name: Owner Reimbursements

followed by...
Account: Bank>Cash
Credit: $100
Memo: "took $100 cash"
Vendor Name: Owner Reimbursements

Owner contributions

A client's late paying an invoice, your business checking account is near zero, and your office rent is due. Don't pay rent with a personal check, write a personal check to your business and deposit it in your business bank account, then pay rent from the business.

Account: Due To/From
Credit (increase): $400
Memo: "loaned $ to cover rent"
Vendor Name: Owner Reimbursements

followed by...
Account: Bank > Checking
Debit: $400
Memo: "loaned $ to cover rent"
Vendor Name: Owner Reimbursements

With these two transactions, your Due To/From account has a balance of positive $300, meaning the business owes you $300. You could write a check to yourself from the business for this amount and you'd be even. See the section on "Zero-ing out the Due To/From account" below for details.

Business purchases made with personal funds

No matter HOW careful I am, occasionally a business expense will be made on my personal ATM card (i.e. I'm finishing up a business lunch and discover that I don't have my business charge cards with me.)

Account: Due To/From
Credit (increase): $55
Memo: "biz expense purchased w/personal funds"
Vendor Name: Owner Reimbursements

followed by...
Account: Expenses > Meals & Entertainment (50%)
Debit: $55
Memo: "meeting with D.Bronski re: Op Agreement"
Vendor Name: The Boat Cafe

Personal purchases made with business funds

You can say it won't happen, but you'll be shopping at Fremont Office Supply and just have to have that cute bulletin board for your kitchen. If you don't have a personal card with you, you may throw it in with a stack of office supplies.

Account: Due To/From
Debit (decrease): $40
Memo: "personal purchase made with biz funds"
Vendor Name: Owner Reimbursements

followed by...
Account: Expenses > Office Supplies
Credit: $40
Memo: "kitchen bulletin board"
Vendor Name: Fremont Office Supply

Recording company credit card transactions

Are your "business" credit cards (the ones imprinted with your company's name) actually tied to your business FEIN? If you don't know for certain, check it out! I learned recently that every business credit card I've ever used were tied to my personal Social Security Number. That means the liability belonged to me - not my business, and for accounting purposes, it was best to treat purchases made with those cards as either contributions from the owner or short term loans. (I prefer the later.)

I enter expenses made on the my business credid card, in the following way:

Account: Due To/From
Credit (increase): $42.15
Memo: "Visa -0667"
Vendor Name: Owner Reimbursements

followed by...
Account: Office Supplies
Debit: $42.15
Memo: "book: Seth Godin's Linchpin"
Vendor Name: Amazon.com

When the credit card statement comes, I pay the total from my personal checking account, and immediately reimburse myself the full amount from the company checking account, and enter like this:

Account: Due To/From
Debit (decrease): $2532.10
Memo: "Payment to Visa -0667"
Vendor Name: Owner Reimbursements

followed by...
Account: Bank > Checking
Credit: $2532.10
Memo: "Payment to Visa -0667"
Vendor Name: Chase Bank

Reimbursing yourself for biz expenses (like mileage, utilities, etc.)

Same applies when I need to reimburse myself for the 21.9% of the house utilities my business owes me each month for use of the home office.

Account: Due To/From
Credit (increase): $58.74
Memo: "21.9% of utilities"
Vendor Name: Owner Reimbursements

followed by...
Account: Expenses > Occupancy
Debit: $58.74
Memo: "fax machine"
Vendor Name: AT&T

Zero-ing out the Due To/From account

Technically, the Due To/From account should always be zero, but if you are comfortable with keeping a little bit of money tied up, you'll start to let it hover at a positive or negative balance, knowing that as you enter transactions it will swing the other way.

When you're ready to zero-out the Due To/From account, you'll be using a Vendor Account called, "Owner Reimbursements." It is very important that you keep reimbursement from a Due/To Account separate from a regular "owner's draw" or employee account, as you'll be paying taxes on the amount of money you withdrew or were compensated for as employee, but do not need to pay taxes on reimbursed funds.

If the balance in the Due To/From account is positive $300, the business owes you $300. You can write yourself a check from the business checking account. The check should be posted to a VENDOR called, "Owner Reimbursements," (you can write the check out in your own name.) If the balance is positive at the end of the year, your accountant will deduct the amount from the total owner's draw and you will pay taxes on a smaller amount.

If the balance in the Due To/From account is negative $200, you owe the business $200. You can either write a personal check to the business, or your accountant will include it in the total owner's draw at the end of the year.


Memory tip #1
The word "to" comes first in the title of the account, "Due To/From". When the company owes you money, you are increasing (crediting) the Due To/From account. When the balance in the account is positive, the amount is what is due TO you from the company.

Memory tip #2  
When the company owes you money, you increase/credit the Due To/From account; when you owe the company money - or take money from the company, you decrease/debit the Due To/From account.

Can you see how valuable this is?

With a Due To/From account, you have an instant record of the amount of money the business owes you, or you owe the business. This is vital for a healthy partnership. If you're writing off a portion of your home office, your partner paid for the business license with a personal check, and you both have business credit cards, Due To/From accouts will tell each of you instantly where each of you stands financially in relation to the business.

Biznik Co-founder/CEO 
Seattle, Washington 
Lara Feltin

Where else will you find other indie business people connecting online & offline, locally & globally, focusing on collaboration over competition? Biznik is business networking that doesn't suck.

Learn more about the author, Lara Feltin.

Comment on this article

  • Biznik Co-founder/CEO 
Seattle, Washington 
Lara Feltin
    Posted by Lara Feltin, Seattle, Washington | Feb 12, 2010

    I want to thank Biznik's accountant, Elizabeth Mance, and the stellar bookkeeper she assigned me, for introducing me to the Due To/From account.

  • General Manager 
Seattle, Washington 
Noah Strasbourger
    Posted by Noah Strasbourger, Seattle, Washington | Feb 12, 2010

    That's a very interesting and informative article. I will be forwarding it onto my book-keeper. Thank you!

  • Washington Federal Assistant Manager 
Bellingham, Washington 
Susan Templeton
    Posted by Susan Templeton, Bellingham, Washington | Feb 12, 2010

    Very helpful Lara, My bookkeeper will be impressed next time she comes to reconcile my books!

  • Tax Professional and IRS Representation 
Blaine, Washington 
Bill Bradfield, EA
    Posted by Bill Bradfield, EA, Blaine, Washington | Feb 13, 2010

    Lara,

    Great and informative article. This simple process will help anyone in business.

    Bill

  • Certified Public Accountant 
Seattle, Washington 
Laura Dodson, CPA
    Posted by Laura Dodson, CPA, Seattle, Washington | Feb 13, 2010

    Lara,

    I also use this type of account in my business and it works great.

    The only problem with it, is that when I look at a company's books and see an extremely large amount in this account. Either the company owes the owner a bunch of money or the owner owes the company a bunch of money. (A bunch of money is defined as relative to the company's revenues.)

    If there is a consistent need to for the owner to invest money in the company. The owner needs to take a good look at how the business is operating.

    If there is a consistent need for the owner to borrow or use company funds outside of the normal earnings distribution process (ie draws, dividends, etc.). Then that process needs to be reevaluated.

    In addition, it's possible that a balance has built up that account because the owner has not taken a look at the balance sheet in a while. Instead choosing to only focus on the income statement.

    So please remember a due/to from account is to be frugally and not for every run to the mall or grocery store. :)

  • Accounting Consultant & Virtual CFO for Creative Service Firms 
Portland, Oregon 
Kelly Totten
    Posted by Kelly Totten, Portland, Oregon | Feb 22, 2010

    I use this method with my clients too. If the software has a "credit card" type of account, I often set it up like a credit card instead of an "other current liability". This gives them the ability to "enter credit card charges" which seems less intimidating than a register to some.

    I think it's okay to not be "frugal" with this account when you are using a personal credit card to pay for company expenses. We all like to earn our credit card perks. This is the case where I set it up like a credit card to enter those charges. I like to see those regularly reimbursed to the owner. If they aren't, then we need to take a look at what's happening in your business.

    Other than that situation, I agree with Laura. Keep the business and personal accounts separate as much as possible. Don't regularly use the business debit card for your personal expenses. (side note - that can be a very awkward situation for the bookkeeper...we all have stories!) If there is a regular need to invest in the company and you aren't getting reimbursed regularly as well, that's a big flashing warning sign.

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