I am getting myself confused regarding how to treat in accounts, If a limited company purchase a vehicle financed by a loan am I correct in thinking that only the interest on the loan is posted to the P&L the actual amount paid each month on the loan is posted to the Hire Purchase account in the BS to reduce the liability. However what happens if a sole trader purchases a vehicle financed by a loan as a Balance sheet is not required,
Also your profit would be much higher if you financed by a loan, are there any other ways of purchasing a vehicle to buy so the main cost can be debited in the PL to reduce your profits.
If a limited company purchases a vehicle by a loan then say the loan over a 3 years for £10,800 Van and the monthly repayment is say £310.
There is therefore 36 payments or £300 of capital each month (£10,800/36). This reduces the loan by £300 each month. The remaining monthly payment of £10 is interest which is charged as a cost to the p&l each month (easiest way is straight line but there are other methods such as sum of digits and other mathematical concoctions). Therefore will be a total of £3,600 charged to the P&L over the 3 year loan.
Original entries are (excluding VAT)
Dr Asset £10,800
Cr Loan £10,800
Monthly adjustment is
Dr P&L interest £10
Dr Loan £300
Cr Bank £310
If you are doing a sole trader and just doing an income and expenditure account then you will be able to claim a deduction for interest in the P&L if the purchase is finance by a loan.
Your profit is unaffected if you pay for the vehicle either by loan or straight cash payment as even if you pay by cash the cost of the vehicle isnt shown in the profit and loss account eg if Limited company was to pay the example above in cash the entry would be
Dr Asset £10,800
Cr Bank £10,800
The only difference between the two payment methods is that you will get relief for the interest on the loan if you take out a loan. In neither option do you get relief for the vehicle in the profit and loss account.
Where you get relief for the vehicle is through capital allowances comp. You will get 100% FYA on a Van (subject to spending limit of Plant and Machinery) or if a car you will get WDA based on the CO2 emission of the vehicle. ie heavy polluters get less generous relief than green cars.
There is also the added complication of benefits in kind if there is personal use of a business owned vehicle by an employee and personal use % disallowance if vehicle is used by a sole trader personally.
