Post the bank receipt of the loan to code 2300 (T9 usually, but you would have to check that sage was set up with this code being the "outside VAT scope" code).
Obtain the loan agreement/statement and if any charges have been imposed, journal a credit to 2300 and a debit to finance charges/bank charges (around 79XX).
Interest can be dealt with in two ways. If a loan statement is received, this will show the actual interest that is charged per month. You can make a journal each month to account for this interest, again credit 2300 and debit loan interest payable (around 79xx)
If its a loan agreement with a "total interest to be charged" figure, you can account for this in one of two ways
1) using the straight line basis method, dividing the interest by the term of the loan. So a 3 year loan would be interest divide by 36.
2) using whats known as "the rule of 78" method. Thats a little bit more difficult to explain but you could google it?
Loan repayments would be T9 bank payments to 2300 (again check this is the code that has been set up as "outside the scope of VAT")
-- Edited by FoxAccountancyServices on Wednesday 16th of October 2013 12:06:42 PM
The rule of 78 means that more interest is charged in the earlier years, because there is more debt outstanding at that point. The benefit of using it, is that you get more tax relief in the first years of the loan.
Using a 36 month loan as an example, I will make an attempt to explain how I do this, bear with me!
I open a spreadsheet and write in the first column
1 2 3 4
All the way to 36. Then I use autosum to add it together = 666
I then use formulas to calculate the yearly factor and interest...
Calculate the number of monthly repayments made in your first year. Lets say that was 3 months.. you start at the bottom and would add 36+35+34 = 105
Lets say your total interest on the loan over the period was £1000, the interest calculation for the first year of the loan would be £1000 x105/666 = £157.65
Had you divided the interest by 36, then the 3 months charge would only be £83.33
In the second year you will made 12 payments so you calculate from 33+32+31+30+29+28+27+26+25+24+23+22 = 330
So for the second year, your interest charged is £1000 x 330/666 = 495.50
Had you used straight line basis it would be only £333.33
Year 3 would show 21+20+19+18+17+16+15+14+13+12+11+10 = 186
So year 3's interest would be £1000 x 186/666 = 279.28
In year 4, you would pay the remaining 9 installments and you interest calc would be based on 9+8+7+6+5+4+3+2+1 = 45
Year 4 interest = £1000 x 45/666 = 67.57
157.65+495.50+279.28+67.57 = £1000
LOL.. dont ask me who came up with that but its pretty nifty once you get your head round it!
-- Edited by FoxAccountancyServices on Wednesday 16th of October 2013 03:31:11 PM
