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?
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
Then each month when you write the check deduct the amount from your 'Note Payable - Ex' account.
Debit: Note Payable-Ex Spouse...$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.
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!