Hey guys, assuming I bought a house worth RM100k, paid 10% downpayment so its 10k, took bank loan for the remaining 90k but the loan plus interest normally comes to almost times 2 the original amount of loan, say 180k. How do you account for these figures in profit and loss, balance sheet and cash flow statement? Thanks!
Assuming the that bank loan was paid directly to the vendor then your initial Spend Money would be:
Then for recording activity on the loan account it really depends on how those activities are transacted.
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Is this the accounting entry for the balance sheet?
Dr property 100k
Cr bank 10k
Cr loan 180k
Dr loan interest in suspense 90k
No. You need separate transactions to receive the loan and buy the house. You only got 90K for the loan, not 180K. And interest is only accrued over time. It never appears on the balance sheet, only in an expense account. Forgetting the fact that none of these transactions would be entered as journal entries in classical dr/cr fashion, the equivalents would be:
Cr loan 90k
Dr bank 90k, recording receipt of the loan
Cr bank 100k
Dr property 100K, noting that this assumes you already had your 10k deposit in the bank
Now you have the property in an asset account, worth 100K. And you have the loan in a liability account for 90K. And unless you have money from somewhere else, you have nothing left in the bank.
When it comes time to make a payment, credit the bank account for the total amount of the payment and debit the interest expense to an expense account and the principal to the loan liability account.
Oh, so end up the balance sheet entry would be
Dr property 100k
Cr Loan (principal) 90k
Cr Bank 10k
Right?
When it comes time to make a payment, credit the bank account for the total amount of the payment and debit the interest expense to an expense account and the principal to the loan liability account.
Means if assuming monthly installment is RM2000 (1500 principal + 500 interest)
Accounting entry would be
Balance sheet entry
Dr Loan (principal) 1500
Cr Bank 2000
&
Income Statement
Expense Interest expense 500
Like this?
But if its recorded this way, then we will not be able to see the total loan amount outstanding (principal + interest)? Since the full loan 180k does not get shown in balance sheet?
The balance sheet shows the status of account balances as of today, it doesn’t show or project future balances. You might understand that the loan will cost you 180k, but today after the first payment the loan is 90k - 1.5k.
Oh means you wont ever get to check the total loan remaining then.
Is this example correct?
Income Statement
Gross Profit 10,000
- Interest expense (500)
= Net profit 9,500
Cash flow statement
Net profit 9,500
- loan principal (1,500)
= Cash 8,000
Balance sheet
Dt Loan principal 1,500
Dt Cash 8,000
Ct Retained earnings 9,500
The total loan remaining is the Loan Principal less Loan Principal repayments. Unpaid interest is just that unpaid interest, its not a cost until its incurred. To take up unpaid interest makes the accounting entries complicated - see opening balance sheet below
Balance sheet after the first repayment
Can’t tell, where does the Gross Profit 10,000 come from also Net Profit 9,500 doesn’t have to equal 9,500 cash.
Also there is a problem with your repayment figures and the loan + interest figures.
If you are repaying 1500 loan in a repayment then that is 60 repayments (90,000 / 1500)
60 repayments of the interest @ 500 only equals 30,000, making the total loan + interest 120,000 not the 180,000 you are quoting.