Setting up a GL account for settlement from my divorce

How do I set up a GL account in my company for settlement/payments I am required to pay to my ex spouse for their interest in my company?


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Well, first of all, sorry about the divorce!

If your business has to make payments, you need to set up a liability account. I'm not sure if you have to pay one set amount, say $100,000 divided into monthly payments for 5 years...or if you have to pay out a percentage of profits each month for a set time...but here are my thoughts.

If you have a lump sum to pay, set up a 'Note Payable - Ex-Spouse' account (a liability) for the lump sum. Your offsetting account - the other half of the transaction - will be an expense called something like 'Divorce Settlement Expense'.

Debit: Divorce Settlement Expense..$100,000
Credit:Note Payable-ExSpouse...............$100,000

Then each month when you write the check deduct the amount from your 'Note Payable - Ex' account.

Debit: Note Payable-Ex Spouse...$1000
Credit:Cash.................................$1000

Not to further confuse you, but if you'd rather take the hit to your profit monthly rather than all at once, you could use what we accountants call a prepaid expense account. It's actually an asset account, call it something like 'Prepaid Divorce Settlement'.

Debit: Prepaid Divorce Settlement...$100,000
Credit:Note Payable-Ex Spouse.................$100,000

Then each month, make a journal entry like this:

Debit: Divorce Settlement Expense...$1000
Credit:Prepaid Divorce Settlement............$1000

It's like paying a years worth of insurance up front, then expensing that over the 12 months of the year.

OR


If you're paying out a percentage each month, you can't very well set up a Note Payable for the amount, because you don't know how much that will be...so you will post each monthly payment to 'Divorce Settlement Expense'.

Hope that helps!

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