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Owner can owe money to business in form of Capital. Capital is a liability but in a intention of earning more money. In capital, risk and reward both are shared.
Tend to disagree with above definition of capital. Capital is more the residual amount a business owes an owner or owners after deducting all liabilities from assets. This would be definition if considering the accounting equation. Could I ask what type of business organisation you are considering – sole proprietorship, partnership or company?
Although legally there is usually no distinction made between a business and its owner, there is the business entity concept in accounting where the business affairs of a person are separated from the personal affairs. This could be practically of use as the loan could still be in existence even if ,for example, the sole proprietor converts business to partnership or incorporates business.
In a sole proprietorship business, technically all the capital (proprietor’s funds) is owed to the proprietor. However, a distinction is made in bookkeeping between capital (more or less a permanent amount in the business) and loans.
A loan could be from a bank.
Suppliers offering credit are in effect making loans to the business for about 30 days at a time until invoices are paid.
It is possible for the owner to lend money too eg to help with a temporary cash flow difficult in the business. The loan and the capital are classified differently for bookkeeping but there is no difference between them in law.
In my own business, if I pay some business expenses personally (eg I use the wrong credit card) , then I have made the business a loan:
Dr Expense
Cr Owner’s loan account.The business bank account can then reimburse me from time to time.
Thanks a lot Sir Ken Garrett!
Now I know that business can owe loan and capital to its owner.
I got You,but your answer to my question is irrelevant. My question is how can owner owe money to business?The owner decided to take a loan from the business bank account rather than take drawings.
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