Home > Updates > Demystifying shareholder current accounts
Shareholder current accounts may sound complex, but they’re a fundamental part of corporate finance and accounting. Below we break down what they are, how they work and why they matter.
Think of a shareholder current account as a financial record book. It’s where a company notes all financial transactions involving its shareholders. These include funds advanced, loans, repayments, dividends, and non-PAYE salary allocations.
Shareholder current accounts help a company to monitor who is investing and how much. This information is important for confirming if shareholders are equally investing in the company.
When shareholders invest, it’s recorded as a credit (i.e., a liability of the company) in the current account, showing their contribution to the business funds which can be used for working capital or development.
When a company lends money to shareholders, or vice versa, these transactions are recorded for transparency. Transactions involving loans and repayments are recorded as debits and credits.
Keeping an eye on the balance of the shareholder current accounts can ensure the current accounts do not unknowingly become overdrawn. ‘Overdrawn’ means the shareholder owes the company money.
When a shareholder current account is overdrawn (in debit) it is classed as a loan to the shareholder. The loan is therefore an asset of the company. In the event of a liquidation, this loan can be called upon to pay any outstanding company debts to creditors. In addition, under NZ tax legislation, a loan to a shareholder or an overdrawn shareholder current account requires interest to be charged at the prescribed FBT rate. This creates company income and increased tax liability.
Items that ‘top up’ or credit a shareholder current account include non-PAYE salary allocations, non-cash dividends and funds introduced by the shareholder. The latter can include physical funds transferred to the company or an expense paid by the shareholder on behalf of the company.
Non-cash dividends increase the shareholder current account balance allowing shareholders to then draw funds as the company’s cashflow allows which may not necessarily be at the same time as the dividend allocation.
Often shareholders want their shareholder current accounts to be in line with their shareholding percentage. Typically cash withdrawals or contributions will be used to maintain this equity.
When shareholder current accounts are in credit (i.e. the company owes the shareholder) interest can be charged on the current account balance so that all shareholders receive a return on their funds invested in the company. This is also an effective way of ensuring that those more heavily invested are remunerated appropriately should the balances be disproportionate to their shareholding.
Accurate records are vital for complying with tax requirements, keeping shareholders informed on their investment in the company, and keeping cash contributions fair between shareholders. Regularly reviewing these accounts and fixing errors or discrepancies is essential to maintain accuracy.
In a nutshell, shareholder current accounts are essential corporate finance tools. They promote transparency, legal compliance, and fairness in financial dealings between a company and its shareholders. Properly managing these accounts maintains trust and transparency within the company and is an integral part of accurate financial reporting
If you would like more information on how shareholder current accounts work, please contact your Nexia advisor. If you are not already a client and are interested in learning more about our Business Advisory services, please get in touch with one of our three offices in Auckland, Hawkes Bay or Christchurch.
