04/09/2025
We often find the concept of a Shareholder Current Account in a company is difficult to grasp. Here's a translation from Accounting Jargon to plain English on some common questions we are asked that relate to the Shareholder Current Account, along with a visual cheat sheet 🙂
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1. What is a Shareholder Current Account?
Jargon:
It’s a ledger account in the company’s books that tracks transactions between the company and a shareholder, excluding wages or dividends.
Plain English:
Think of it like a bank account inside your business with your name on it. If you put money into the business, it goes into this account. If you take money out (like paying for groceries with the business card), it comes out of this account. It keeps a running total of what the business owes you—or what you owe the business.
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2. What are Drawings?
Jargon:
Drawings are non-salary withdrawals made by a shareholder from the company, typically recorded against the shareholder current account.
Plain English:
“Drawings” is just a fancy word for money you take out of the business for personal use. It’s not wages, and it’s not taxed when you take it out—it’s just you using your own money that’s sitting in the business.
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3. Do I Pay Tax on Drawings?
Jargon:
Drawings themselves are not taxable income; tax is paid on the shareholder’s share of the company’s profit, not on the withdrawals.
Plain English:
Nope—you don’t pay tax on the drawings. You pay tax on the profit the business makes, whether you take that money out or not. So if the business makes a profit, the IRD wants its cut, even if you leave the money sitting in the business.
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4. What is a Shareholder Salary Allocation?
Jargon:
A shareholder salary is an allocation of company profit to a working shareholder, often used in lieu of PAYE wages in closely held companies.
Plain English:
It’s a way to pay yourself from the business’s profit at the end of the year. Instead of getting a regular wage with PAYE taken out, your accountant might say, “Let’s give you a shareholder salary of $60,000.” That becomes your income for tax purposes, and the business gets to claim it as an expense.
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5. If I’ve Made a Profit, Where Has It Gone?
Jargon:
Profit may be retained in the business, distributed via shareholder salaries or dividends, or offset by non-cash expenses or drawings.
Plain English:
Just because your business made a profit on paper doesn’t mean there’s cash in the bank. That profit might have:
• Been used to pay off loans
• Been spent on new gear or stock
• Been taken out by you as drawings
• Been eaten up by non-cash expenses like depreciation
So, the profit’s real, but it might be tied up in stuff rather than sitting in your bank account.
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