Hi, I am preparing my books for filing, I was a bookkeeper many moons ago so am pretty okay with debits and credits, but find myself stuck with a balance sheet entry. I bought a company van in the 12-13 tax year on HP. The total cost was £11243, with trade in, fees etc we were left to pay £2755 interest payments, spread over 5 years.
I put the loan amount of £11243.00 into a loan liability account, the van cost of £8488.00 into an asset account, and the finance interest of £2755.00 into an expense account. The monthly payments that go to the HP company are paid into the liability account bringing it down, so the loan total on the balance sheet for the end of the year is okay.
I know I can write the finance interest off over the length of the loan, the finance interest at the end of the 12-13 year amounts to £137.74 (part-year - van purchased 3 months before end of tax year). Next year's finance will be £551 and so on until it is paid off. Easy enough, the problems is when I run a P&L report for 12-13 and the finance interest shows the full amount of £2755, so I need to journal off the balance pertaining to 2013-14 years and onwards to leave the interest figure of £137.74 for 12-13 year.
When creating a journal to correct, I entered CR £2617.26 Finance Interest (the P&L expense account) CR what??? I am stuck here - if I DR the loan liability account it reduces that by £2617.26, the only other balance sheet entry that I can see where it might go would be a category called "provision for reserves and liabilities", but I'm not sure if this is correct either as according to some websites I have looked at, this should only be used for taxes...
Help! This is doing my head in. I have parked it in the opening balance equity for now but I know that is lazy bookkeeping and it shows in the capital & reserves part of the balance sheet. Is deducting it off the loan liability account the correct way? Or is there another category to use that makes it clear I am deferring the finance interest expenses?
Your bank payments will reduce the liability, to account for what's been paid off.
I think the way to look at it is... the loan interest has been fixed over the period off the loan, and that's based on what you are going to be charged each month for the next 5 years.. but those 5 years haven't happened in full yet, so the company doesn't actually owe that interest yet.
Some will have the argument for the fact that whilst its not been incurred, they are always liable for the full amount, and so want to show it reflected on the BS, and hence why I suggests using a prepayment if you prefer this.. Its swings and roundabouts at the end of the day though.
HTH!
-- Edited by FoxAccountancyServices on Thursday 16th of January 2014 12:47:31 PM
In my initial transaction I created an entry showing the total loan of £11243.00 as a liability, splitting the van cost of £8488 into an asset account, and the full interest amount of £2755 into an expense account, so the balance sheet would show the actual amount owing to the HP company at the end of the year. Should I not have put it the total finance interest in, rather just entered in the first year's interest due (£137.74) and a liability of £8625.74? then in year 2, enter the finance interest amount for that year (£551.00)? If that is the case I could keep my entries as they are and just post the journal balance to the loan account, reducing the balance.
I'm using the SL method, for all the money involved I thought the full actuarial method was a bit overkill. Considering SL it is deferring some tax relief on the interest I thought HMRC wouldn't mind in the case of an inspection.
I personally would have done what you have detailed above, only accounting for the interest that's been incurred so far, on the balance sheet. But, you could create a prepayment for the interest due in later years, should you not wish to do it my way. The net assets will be the same, you would just have a higher debtors figure and a higher creditors figure.
I have a spreadsheet that calculates the rule of 78 method, which makes light work of it... and I usually do it that way, as it results in a higher interest in earlier years - lower tax bill makes the clients happier. :))
-- Edited by FoxAccountancyServices on Thursday 16th of January 2014 01:14:17 PM
Thanks for that, have moved to the loan account. My mistake was in thinking I had to show the total loan in the balance sheet, didn't know it was correct to reduce it.
All good now, amazing how something so simple can stall your progress and take up so much time.
Oh I know what you mean, Denis... Since leaving employment, I have learned more in 18 months than in 15 years.. its brilliant, but you are right, it is so time consuming trying to get your head round things.. especially with no boss to ask questions to!!
But its great that you are proactive about doing things the right way :)
