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[The business can owe money to, or be owed money by, it’s owners.]
This sentence is in FA2.
I hv a bit confusion.I know the business owes the money invested by it’s owner(Capital) according to business entity concept, but my question is how can business be owed money by its owners?
I appreciate your help.
Much of the answer depends on business entity in question. However, the way you phrase the question suggests you have a sole proprietor chiefly in mind.Given this the owner may have a level of capital requirements they wish to maintain as part of a business plan. Or they may take goods in exchange for iou note put in till. These are just a couple of ways this would be possible.Hope this helps.
With respect to this query, both sole traders and partners can make loans to their businesses as well as injecting capital. Indeed, in partnership accounts, partners’ loan accounts are common.
The business can also owe money to a sole trader or partner. For example, if the owner went on a business trip, paying expenses personally initially, then until the expenses were reimbursed the business owes money to the owner.
In limited companies, loans can exist between shareholders and a company, and directors and a company. For example, a bank could own shares in a company as an investment but also make a loan to the company.
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