I had hit by the wall. When I’m doing one of my client’s company account. It is related to limitation of not allowing sales invoice/purchase invoice to use Bank Account/Cash Account in line items.
By far the company has established more than 13 years, no issue with auditors. Just recently they switch the accountant to me. So this is my first time with the said client.
What interesting and frustrating is. The company purchase invoice include line item of loan cash from his/her vendor. Where Manager Does not allow it. For Repayment there is no interest only principal, even there is. it can be split at payment form in manager.
So as you assume the purchase invoice some items double as loan from its vendor.
Can the limitation lift from manager? or is there another way to do it?
Even the journal Entry does not allow it.
This limitation also affects me when doing bank reconciliation. The bank statement has the record but the manager can’t reflect.
if I record as receipt where by
debit bank
credit revenue or expense will misrepresenting the nature of transaction / if I entered of liability account of the name of the vendor (loan financier) in payment voucher they prepare will conflict the transaction recorded in manager. If choose liability account it will left the liability account loan financier account it will balloon as the payment will be made at account payable instead liability account loan financier account. and only the account payable will be overpaid when payment is made.
Does the supplier actually deliver cash to your client? That is the only circumstance under which a bank account would be involved.
Or does the supplier simply extend credit? In that case, enter the full amount on the purchase invoice, but pay in accordance with the terms of the sales agreement. Unpaid amounts will remain due. This does not sound like a loan. It sounds like ordinary selling on credit.
Can you explain the situation more completely? I have these questions:
Whether by cash or wire transfer, why is the supplier transferring money to your client, who is purchasing goods from the supplier?
If the supplier is including delivery of money on an invoice with other goods, why is this not simply a discount?
If this is some form of marketing assistance advance (which manufacturers sometimes provide to promote distribution of their products), was the invoice just a method of recording the transaction? If so, it should be entered as a receipt, not a purchase invoice.
Basically the company director and their vendor are on trust basis, basically the vendor use the companies license to acquire government projects, in return favour like short term loan. However, instead formal agreement they sent to the company instant transfer cash and purchase invoice.
No physical supply, discount or promotion . the purchase invoice line items some are purchase for training service and 1 or 2 is a short term loan without interest, not more than 3,000 ringgit malaysia.
As far the director explain to me they are long known each other. A mutual benefit in other words. The track record of the company, they paid off all the loan they had last years with the vendor, most of the loan are spent like rent, electricity some are for paying overdue companies car loan. the small expenses.
Suprisingly this company is clean. The only debt they have is towards the auditor company secretary and car loan with less than 9,000 ringgit malaysia left to pay off.
so what are my options? do I have to break their normal pattern or lubos able to lift the limitation or @tut had other way to record it without misrepresentation?
The issue with the third question last sentences, is the vendor is supplier for manpower in training service as well as financier for short term loan, The vendor deliberately sent to the company their sales invoice with short term loan recorded in. No other paper evidence to show than the purchase invoice itself. they keep it simple. The company didn’t break the trust at all. if not I would be in hell if the client has lot of debt pile up. and they are old folks.
As I noted it, auditor does not find any fraud, no misconduct. the short term too immaterial to consider having written agreement and pass it off as accepted practice. They have same auditors for years.
Create a liability account for the loan. Enter a purchase invoice matching the supplier’s sales invoice, entering the loan amount as a negative number. Since the loan is not an inventory item, it affects nothing except the Accounts payable balance. In this respect, it is no different than the other lines on the invoice, but will decrease the Accounts payable balance rather than increasing it. At the same time, enter a receipt for the wire transfer. Post it to Accounts payable for the supplier. The supplier’s sales invoice serves as documentation of both transactions.
For example, a supplier bills for 200 worth of accounting fees and sends a wire transfer for 1000. Enter the purchase invoice like this:
The result is clear separation of amounts owed for the ordinary payable of 200 and for the loan of 1000. And the bank account reflects the incoming wire transfer.
Another way to record this is to include only the ordinary purchases on the purchase invoice. You still need the receipt to record the incoming wire transfer, but you would post it directly to the loan liability account. The ultimate result is identical. The advantage of the first method is that the purchase invoice matches the supplier’s sales invoice. But there is no way to avoid the receipt transaction, because purchase invoices do not reflect the movement of money, but only the creation of obligations.
Note that all of my comments ignore any questions about the legality of the arrangement. In some jurisdictions, interest-free loans are not permitted, and the lender would be required to calculate imputed interest income regardless of whether any was paid. In some places, taxes are imposed on financial transactions, which I did not address. By placing the loan on an invoice, the supplier is effectively selling money, which can be subject to many regulations. Simple promissory notes would be much cleaner from an accounting standpoint. A single paragraph will generally suffice.
@tut brilliant! you just gave me the hint. I agree with your approach, but when you put -1000, it hit my head somwhere I can just do other way around.
What if, Recording receipt like follows.
Debit, Bank
Credit, Account Payable ( with or without Specific Invoice) (it will show at total calculation instead if invoice is specified)
To compensate,…
For the sake of description i just +1000 and -1000 at purchase invoice line items.
About the local tax law. that only applies to directors loaning to own company,
However I never heard a case where they should charge interest in case of invoices.
Promissory notes are not being practice when it comes to Small Companies and enterprise. hence the simplicity of this folks, make my head working more than they normally be. ahahaha
This is what I illustrated with my second screen shot.
I don’t understand what you mean. Are you saying you would have two offsetting lines on a purchase invoice to represent the loan? If so, that’s my second approach, only I left out the cancelling lines on the purchase invoice because they will have no effect. Note that if you do this, you still need to change the posting account on the receipt so it goes directly to the loan liability account.
Invoices are not involved. Interest is calculated on loans below market rates of interest. And it is then subject to income tax as though the interest had been received, even though it has not. The only entity that is paid anything is the tax authority. This is done to prevent hiding gifts as loans, among other reasons.
Maybe not. But as long as loans are not illegal, why not use them. The term only refers to the agreement for a short-term loan. It specifies who has borrowed how much from whom and when it will be repaid, with whatever interest rate, if applicable. It is generally considered to be the documentation that establishes the liability and allows the lender to recover via legal proceedings if the loan is not repaid. Surely you must have some equivalent, even if called something else.
What I’m suggesting. instead establish loan liability account. Why not doing directly in trade payable account. it still represent correctly the nature of transaction, only the the shortfall is the aesthetics (visual) instead at line items it showed at total calculation of the said purchase invoice with what receipt number it against the amount of purchase invoice.
The offset is a way to compensate the aesthetics. unless show one line with 0 amount value. that would be better.
The instrument of the short term loan without written agreement explicitly. so far I don’t know what is call neither I have came across the scenario that often. it is grey area, since there is no definite due date. only shows obligation to pay back. It does not affect the actual tax payable, since eventually it pays back within 6 months or so.
Not where I’m Detailing out the description where I can adjust it when there is transaction to settle off the loan once the time comes. I even put the External Invoices Reference Number for anyone or myself in future. Is obvious the auditor will ask for vendor invoices to cross check .
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