I’m wanting to add an interest component to a long term loan liability account. It doesn’t need to be a month by month thing with statements and all that. I’m thinking just a single manual annual transaction to adjust the balance of a Director’s Loan to the company to reflect changes in the Consumer Price Index over the preceding year.
The intention is that when the loan is eventually repaid to the Director, inflation will not have eroded the value of the capital.
I don’t see any function to do exactly that, but also if it were to be done via a Journal entry, while it is clear that the loan liability account would take the debit, where would the credit go as no actual cash would move from anywhere to anywhere else?
Thanks in anticipation,
You would make such an entry by a journal entry, if you haven’t already turned the Journal Entries TAB on go to Customise, under Settings, and click Journal Entries which is near the bottom.
As for the entry itself you would credit (not debit) the loan liability account so that it increases when the interest is added and the debit would go to an expense account called interest paid
The Director should also be made aware of this interest as it would be declarable income for him. He has the option of taking it up annually or when it is paid in cash,
Thanks for that.
I think using the Journal Entry system is a bit like trying to communicate in a foreign language. If you concentrate hard enough, you can sometimes figure out what another person is saying, but have no hope of ever making an intelligent reply.
I’ve just failed spectacularly trying to record a similar transaction. There is an arrangement in place where a fixed percentage of a particular income source is donated to an orphanage. I created a liability account to hold the donations until there was enough there to make an actual transfer transaction worthwhile, but when trying to “Spend” the donation from the bank account to the liability account, it shows up in the summary as a negative liability, which is in my mind at least illogical. So glad I’m not an accountant - my head hurts already…
I can’t possible see how a journal entry could be described that way. You state “I’ve just failed spectacularly trying to record a similar transaction” - maybe you could provide details.
You also state “when trying to “Spend” the donation from the bank account to the liability account, it shows up in the summary as a negative liability”
In that case only two things could have happened, either insufficient donations had been posted to the liability account or the “Spend” was greater then the account balance.
Perhaps you are right, @pcal, but that is the language of double-entry accounting. And Manager is a double-entry accounting program. Many of Manager’s convenient features are shortcuts for journal entries, but they tend to obscure the underlying fact that equal, simultaneous debits and credits are part of every transaction. Unless you understand the basics of double-entry accounting, you will never understand what Manager is doing. That would be like trying trying to read without knowing the alphabet. I recommend spending a few hours with the tutorials at http://www.accountingcoach.com. It is free, and you can learn just about anything a small business person needs to know. He has great examples in the form of stories.
@Brucanna I know (because it didn’t work) that this was the wrong thing to do, but it was just like I said in the post above - from the bank account screen where the money is, I hit “spend” button, entered the amount, and selected the liability account I had just created to transfer the amount. Then, looking at the liability account from the Summary screen, it showed the amount I had just tried to put in there as a negative amount.
Obviously I was wrong. I understand that the liability account isn’t another cash account, but I couldn’t see any other way to indicate the amount being removed from general revenue. It is a bit like allocating money to cover a liability to an employee - it hasn’t been spent yet, but will be and so shouldn’t be allocated to anything else. I don’t have employees yet so this system was inactive, but I even tried doing it this way, setting up the orphanage as an employee, but that didn’t make sense either.
All I can see to do for now, is just calculate the amount amount manually, and spend it from the bank account and allocate it to a “donations” expense account. At least this way the summary still remains logical, but I can’t accumulate the amounts until there is enough to make a payment worthwhile, and neither can I separate the amount out in a report from any other donations that may have been made.
@Tut It is precisely those “shortcuts for journal entries” you talk about that makes me love Manager so much, and have led me to recommend it to so many other people.
I have a copy of MYOB, which I hate almost as much as if it had been written by Micro$oft. It is to my mind completely illogical and totally dependant on deep black magic. My Accountant originally set it up for me, and I used it for some time just filling in the blanks and clicking the report buttons, and praying it was all correct.
I owe a debt of gratitude to @lubos for making Manager available, because without it, I’d be using a biro in a 12 money column book rather than use MYOB.
Thanks also for the link to the tutorials, I will be looking at them shortly… Hopefully a little more knowledge will help decipher some of the still un-shortcutted features (if that’s even a word ).
Your trouble with the orphanage contributions stems from the fact that you were not spending money from the bank account. A Spend Money transaction credits the bank account, representing the actual removal of money from the company, which did not happen. It must be balanced by a debit, and debits drive liability accounts in the negative direction. So you say a negative balance.
Your contributions to the orphanage are not a reduction of revenue or income. Yes, they do offset the income account involved as far as net profit is concerned. But they are really an expense, a donation. From an accounting standpoint, they are actually unconnected in any way with the revenue from the particular source you mentioned. You just happen to base your planned donations on that source. Depending on your form of organization and local tax laws, they might not even be deductible for tax purposes. They may be charitable donations. Or they may be advertising, since you presumably derive some public relations benefit from them. Competent tax and legal advisors can resolve those issues.
From Manager’s perspective, I would handle the situation this way:
Periodically (this could be at every income transaction from the designated revenue source, or once a month, or once a year), use a journal entry to debit an expense account named something like Accrued Donations and credit a liability account with a similar name. This liability accounts functions much like Accounts Payable, but for the orphanage.
When the accrued donations reach sufficient value, Spend Money from a bank account (this is crediting the bank account) and allocate the payment to the Accrued Donations liability account (this is debiting that account). Because you built up the balance over time, this account will now never by negative. Your payment to the orphanage will zero it out.
By journal entry, debit an expense account named something like Donations and credit Accrued Donations. This makes it clear that the amounts set aside for the orphanage have actually been paid.
Now, that is a lot of work, but it gives you visibility along the way. A more streamlined method is to simply monitor the revenue coming from the designated source so you can keep track of what the designated percentage comes up to. When it is large enough, Spend Money and allocate the transaction to the Donations account. One step, but no formal interim visibility.
Some accountants would probably maintain that the liability account approach is incorrect, because you have no legal obligation to pay money to the orphanage (unless you actually have an enforceable contract with the orphanage). They would say that from an accounting perspective, you are just making decisions to donate to a charitable cause on a regular basis. Whether that is considered a normal, necessary, and therefore allowable cost of business is for local experts to decide. If it is not, the owner(s) can still decide to do with profits whatever they wish. Again, depending on local law, that might be more advantageous.