Proper Accounting of Business Loans Will Help Save Time and Money Down the Road

As new businesses are starting out, it can be difficult to establish a steady cash flow to cover expenses. Business owners often want to “lend” their business money here and there to make sure the company stays operational. In many cases, where the business only has one member or owner, these loans go undocumented and no interest is paid when the principal is paid back. Once you decide to use your personal funds to invest in your business, you’ll need to work with your accountant to determine if the money should be treated as equity or as a loan to the business. Either way, the transfer of funds between owner and business should be well documented in the company’s accounting records. An equity investment, commonly referred to as a capital contribution, is when the owner transfers money into the business only for an increase in the owner’s equity. This is not a...