Question

Karla Heyne is the sole shareholder of XYZ Corporation. This past year Karla paid her retired father, Paul, $10,000 from the company’s checking account because he was having financial trouble. XYZ files as a C corporation, and Karla directed her accountant to deduct this payment as compensation on XYZ’s return. What would you do with this information if you were Karla’s accountant?

I need to write 500 words. Not asking for the paper to be written for me. More looking to see a summary or bullet points to sum up the best way to anser the question. Thanks!

Answer 1

In this situation, Karla has used company's checking account to pay for the personal expenses. She is asking the accountant to report it as a business expense. Following actions can be taken:

1. Inform Karla that there should be a clear difference between the personal and business expenditure. Mixing of expenses can cause legal issues.

2. It will not be easy to justify such expenses as legit business expenditure during future audits.

3. Use of memo/notes for documentation purposes.

4. There is a temporaty account (Drawings account) which can be used as an accounting entry for such a situation. The entry can be as follows:

Drawings A/c                              $10,000

                          To Cash A/c                           $10,000

5. The Drawings accounts is an offset to the equity at the end of the year. So, in the Balance Sheet, equity will be reduced by the drawings account balance at the end of year which accounts for all personal expenses during the year.

6. This has no impact on the Income Statement so profitability (income calculation) will not be impacted.

7. It is a general practice to maintain Drawings A/c which is legal and ethical.

8. This will give the true and fair value of the Financial position of the organisation which is used by all the stakeholders like creditors, government, customers, tax authorities, etc for decision making.