How to enter interest charges on a property loan

[p4unger]

Hi @JAV. Did you setup your property loan as a Bank Account under the Bank Accounts tab? If so, you do have to set the opening balance to a negative value as the loan should have a credit balance.

While the interest and fee are listed on the statement, you do not enter them into the loan account in Manager.

All 3 parts of the $797.00 payment should come from your regular bank account. Apply the interest and fee amounts to expense accounts using the Receipts & Payments tab, and apply the remainder to the loan account using the Inter Account Transfers tab (assuming your loan was setup as a Bank Account). Afterward, your loan balance should match your statement and the interest and fee will be directly expensed to your P&L.

As an example, based on the screen shot of your statement, I can infer your previous balance before the bank charged the interest of $482.71 was $154,200.17 (correct?).

Using @Tut’s illustration in post #18, no entry is made inside the loan account. The total of $797.00 comes from your regular bank account. The interest and fee are paid to expenses, leaving only $306.29 paid to your loan account; 154,200.17 – 306.29 = 153,893.88, the balance your statement shows after your $797.00 payment on 15 March.

[Brucanna]

@JAV

When I enter as you guys have told me to, all the balances are wrong, the normal bank account, and the property loan liability account.

The problem is your screenshot shows that you haven’t entered “as you guys have told me”, via either method, if you had then your screenshot would have looked like this:

or this:

My preference is the first as you don’t have to do calculator calculations as required by the second, also all the transactions will exactly match your Loan statement with the first.

@JAV

Do I need to crate a NEGATIVE bank account for the property loan ?

NO - The Loan Account should be a standalone Liability account, otherwise you are going to get into a mess with using a clearing account in lieu of the Inter-account transfer.

Also, there is no need to enter “Qty” numbers, they only relate to Inventory Items.

[Tut]

@JAV

the interest and the service fee are taken out if the LOAN account, not the account where the loan payment is paid from.

You need to read the first sentence in my post #18 again. Interest and fees are not being taken out of the loan account or loan balance. They are being reported on a loan servicing statement. The loan comprises the funds provided to you by the bank. The loan account is the liability account you set up in Manager. The loan servicing statement is simply a convenient way for the bank to report everything related to the loan.

While it might be reassuring to see “balances” on the servicing statement match balances in your Manager accounts, there is no accounting reason for that to happen after every transaction. The only time your loan servicing balance will match anything in Manager is after all monthly transactions have settled. Then, the balance of your servicing statement should match the balance of your loan liability account in Manager.

[Brucanna]

@Tut

Interest and fees are not being taken out of the loan account

In terms of the financial institution yes they are and @JAV illustrated that in post #16.
Your so called loan servicing statement is merely reporting the transactions that have occurred within the loan account, how else does the financial institution have a running total of the loan balance > Principal - repayments + interest + fees.

When the financial institution creates charges they are in effect in their books:
Crediting > Income
Debiting > Client Loan (taking “funds” out of the ledger account so that the client owes more)

[Joe91]

If JAV could start afresh and post the screen images with the information asked for, he/she will no doubt get clear guidelines on how to handle his/her situtation

1. Screen image of summary page showing where the loan is recorded on the balance sheet and the bank accounts from which the payments are made - blank out any names if required
2. Explain how the initial loan was funded - by receipt, opening balance, etc along with edit screen of the transaction if appropriate

[JAV]

This account is in Liabilities - BM HL Farm/Office home loan
This is the bank account the repayment in deducted from -

Code	Name	Cleared balance	Pending deposits	Pending withdrawals	Actual balance
Edit	11110	3863/9113 CBA
Remember account number is just an acronym.
Loan was funded by CBA bank, Commonwealth Bank of Australiia, many years ago.
The LOAN balance owing is reduced by the $797 repayment, then the interest and the bank fees are deducted from the LOAN , which then increases the balance owing.
The Bank account is NOT where the interest and the fee is paid from.
The Bank accoount statement does NOT show the interest or the fee, only the LOAN. statement shows them.
Does this help ?
On Manager, I want to see an accurate balance in both the loan in Liabilities, and the bank account, in Bank Accounts.

[p4unger]

Hi @JAV . I believe I understand what you want; record the interest and fee as increases to the loan balance, and then record one payment from your bank account to the loan.

Since your loan is setup as a liability and not as a bank account, in Manager this can be accomplished by creating a journal entry to debit expenses and credit the loan for the amount of the interest and fees, and then creating a payment from Receipts & Payments from the bank to the loan.

However, please understand this is unnecessary and, depending on the prevailing accounting standards, may even be considered incorrect.

I know this is likely not what you want to hear, and that it seems like we are all repeating each other, but the processes described above will handle the accounting correctly. It is true they will not always replicate the loan and bank statements in your records, but accounting does not demand your books match any bank’s, only that the end result can be reconciled.

Your bank statement will never show the allocation of the $797 among principal, interest, and fees; from your bank’s perspective, they do not know the payment will be split among three charges, they only know money is going out. Your loan does not actually increase because of interest and the fee; CBA bank adds them to your statement because from their perspective, they are additional money you owe to them and it is more convenient for them to include those charges in your loan statement than present a separate bill.

Your books should be handled from your perspective to reflect your economic activity. For your accounting situation, the money taken out of the bank is split because it is satisfying 3 of your obligations; it is paying the fee, paying the interest, and the remainder is paying down the loan’s principal. This may show in Manager as 3 line items for one payment, but the total of those 3 items is $797, the same as the single $797 entry on your bank statement; the end results match even if you take different “paths” to get there.

Likewise, the loan is only decreasing by the amount left over after interest and the fee; increasing it by the interest and fee, only to immediately reduce it by the same amount as the interest and the fee results in a $0 change, making the transaction superfluous. Recording just the amount that reduces the principal will still result in your ending balance matching CBA’s, even though CBA’s statement shows more line items.

Finally, the interest and fee are expenses, not changes to the loan (even if CBA chooses to show them that way). By recording these straight to expenses instead of adding them to your loan account only to immediately expense them out of it, you “eliminate the middle man,” so to speak.

I don’t mean to come off presumptuous, but it sounds as if you may be fairly new to accounting, or at least new to handling debt transactions. I can recommend here Is a loan payment an expense? | AccountingCoach as a good start to learn more about the accounting treatment for loan payments. It may also be beneficial to consult a local professional accountant who can walk you through the process in person since that may provide more clarity than an online forum.

[Tut]

@JAV, @p4unger has made the exact same points I did earlier, hopefully in language that will be clearer to you.

I don’t say this to claim credit in any way, but to stress that you should not think of his post as another confusing bit of contradictory advice. We have emphasized the same points:

• Interest and fees do not come out of your loan. They are separate charges determined by your current loan balance or terms of the loan agreement.
• Neither your loan nor your loan liability account in Manager is the same thing as the statement you see from the bank.

One thing @p4unger did that might be especially helpful to you is describe the transactions as if the holder of the loan and the bank account from which you made your loan payment were completely unrelated. It is irrelevant where your payment came from. The loan holder could still produce a servicing statement like you showed for convenience, combining additions and subtractions to the overall amount you owe, without actually affecting the loan itself. The loan declines with every payment by the amount left over from your payment after interest and fees. (The loan terms and conditions almost assuredly specify that to be the case quite explicitly. In other words, the holder of the loan makes it money before reducing the amount you owe on the principal of the loan.)

[Brucanna]

I am completely lost by these comments:
1 - Interest and fees are not being taken out of the loan account or loan balance.
2 - Your loan does not actually increase because of interest and the fee;

Let say the loan balance at the start of the month is 10,000.
The month’s repayment is 1,000
Interest for the month is 100

What is the loan balance at the end of the month 9,000 or 9,100.
Based on the above comments 9,000 as the interest doesn’t affect the loan

Therefore in the bank’s books what is the interest income transaction
Credit Interest Income 100
Debit ??? if it’s not the loan account.

I thought @JAV illustration clearly showed the loan’s balance being adjusted:

@JAV

I want to see an accurate balance in both the loan in Liabilities, and the bank account, in Bank Accounts.

If you have followed one of the alternate processing examples provided then you will have that result.

[p4unger]

@Brucanna

Therefore in the bank’s books what is the interest income transaction
Credit Interest Income 100
Debit ??? if it’s not the loan account.

Hi @Brucanna; from a lender’s perspective interest is always period income and not an increase to the principal they receive back. Upon computing and charging the interest, the journal entry is:
Dr. Accounts Receivable
Cr. Interest Income.

Upon receiving the payment, the entry is:
Dr. Cash
Cr. Accounts Receivable

[Brucanna]

@p4unger, I understand your point but unsure if that is reality. Yes the period income is in the P&L, but the BS is an “as at” report. You don’t have BS covering a period.

Firstly, wouldn’t the entry be as below as the payment generally exceeds the interest:
Dr. Cash
Cr. Accounts Receivable
Cr. Loan

Let say we have a loan where interest is calculated as of the 20th of the month and the payment is due on the 28th of the month. Why is it then that when you look up that loan account online on the 22nd, the loan account balance is shown including the 20th’s interest.

I can’t imagine that the same interest is being reported in both the accounts receivable and loan accounts at the same time.

What about overdrafts, which are just another type of loan account, which only have deposits and withdrawals, no monthly payment. If the interest income is being debited to Accounts Receivable, when or where is the payment that clears the Accounts Receivable balance. Once again, if you look up that overdraft account online, the overdraft balance includes the interest charge.

Or the opposite to the loan account, a saving account. Based on your premise if the banks are being consistent, then the interest entry would be:
Debit Interest Expense
Credit Accounts Payable
Therefore what triggers that accounts payable entry to be transferred to the savings account, where once again it can be seen as part of the balance on the date is was due.

[p4unger]

Hello again @Brucanna ,

Perhaps the following illustration can better demonstrate.

Using your example numbers;

A bank will record the initial loan to a borrower as on row 3.

Once interest is calculated off of the loan’s balance, it is entered on the bank’s books as on row 5. At this point they may indeed send a statement or update an online account for the borrower indicating the borrower still owes the $10,000 loan and $100 in interest; depending on how the bank presents their statements, it may appear to the borrower the bank has added $100 to the loan, even though no entry has been made to the Note Receivable.

Once the borrower pays, the bank allocates the payment as on row 7; $100 satisfies the A/R (the borrower’s payable) and the remaining $900 reduces the Note Receivable.

Things proceed in this fashion until the Note Receivable is reduced to $0.

It may seem to be a matter of semantics (saying the bank deducts the interest portion from the payment vs. the bank adds the interest to the loan), but in the books there is never a subsequent debit entry (increase) to the Note Receivable account on the bank’s end. That is what @Tut and I were referring to when we indicated interest does not affect the loan.

As to why banks and lenders choose to present statements and online accounts the way they do, we have to be mindful these can be governed by local and national laws in attempts to make things more clear to borrowers that their loans are not decreasing by 100% of their regular payments.

For your other questions; checking accounts are liabilities to banks, so overdrafts simply result in a credit balance account going into the debit side; the payment that clears the A/R balance for any interest or fees charged because of the overdraft comes from the customer’s next deposit; the credit is split between A/R and the customer’s deposit account. For the savings account, you are on the right track, but since the account is generally in the custody of the bank, the credit entry is usually directly to cash.

I hope this helps, but I think we’re getting beyond the scope of this topic. If you want to continue the discussion we should start a new topic, or feel free to message me directly.

[generalegend]

I think that Banks would have deposit subsidiary ledgers (special type of accounts payable) and loan subsidiary ledgers (special type of accounts receivable) so, in the example given by p4unger the “Note Receivable (A)” would be the loan subsidiary ledger and the amounts attributed to “Accounts Receivable” in the example would go directly to the Note Receivable and then this is why it is reflected in the borrower’s loan statement. (special type of debtor/accounts receivable statement)

[Brucanna]

@p4unger

the payment that clears the A/R balance for any interest or fees charged because of the overdraft comes from the customer’s next deposit; the credit is split between A/R and the customer’s deposit account.

Sorry but this actually makes no sense at all.
What you are saying is this, the business receives, say 3000 from it customers, so it creates a New Receipt in their Manager books: Dr Bank 3000 Credit Account Receivable: Customer A 1200, Customer B 1000 and Customer C 800.

Now lets say the overdraft occurred 300 interest.

Now based on your comment “the customer’s next deposit; the credit is split between A/R and the customer’s deposit account” which means that the bank would put 2700 to the customers deposit account and 300 to accounts receivable.

Now perhaps you would like to explain these two things:
1 - If the Business has a 3000 deposit in its Manager bank account and the Bank has a deposit of 2700 into its customer’s deposit account, how do the two accounts reconcile.
2 - How would the Business know what interest expense it has incurred.

If you are going to suggest that the Bank’s Statement somehow represents a remanufacture of figures rather than being a mirror image of the transactions then you have totally lost me. An audit nightmare, why, because an external auditor validates that the customer’s transactions on the statement are an exact match with the Bank’s GL account transactions.

@generalegend

the “Note Receivable (A)” would be the loan subsidiary ledger and the amounts attributed to “Accounts Receivable” in the example would go directly to the Note Receivable (A) and then this is why it is reflected in the borrower’s loan statement.

Exactly, totally agree.

[p4unger]

I infer you mean to say the business which collected $3,000 was overdrawn on its deposit account and that its bank will charge it $300 interest for covering the overdraft.

Using that assumption, this illustrative example may help to clarify;

The bank will assess the interest by creating a receivable and recognizing revenue (interest charged to customers is operating revenue, ASC 230), as on row 4. Regardless of what the business does in Manager, the bank will allocate the $3,000 deposit as on row 5, crediting the $300 receivable and putting the rest in the business’s deposit account (“splits the credit”).

Provided the business knows—or can calculate—the interest it will be assessed for its overdraft, it should create a payable and incur the expense (interest paid is an operating expense, also ASC 230), as on row 13. When it deposits its cash, it will satisfy its payable and debit the remainder to their deposit account (they “split the debit”), as on row 15.

The balance of the deposit account on both the bank’s books and business’s books, reconcile (“[C]”).

In the event the business can not calculate, or lookup online, what its interest is, it will record a balance of $3,000 in its deposit account, even though the bank has the balance at $2,700. The business will learn its interest charge when it receives its statement. By way of example, the bank will provide something as such;

This may make it appear to the business all this activity occurred within their Deposit Account, but you can trace each amount to a discrete account of the bank’s books.

At this point the business must go through its normal reconciliation process; it should detect the $300 charge that is not on its books, and post an adjusting entry by debiting expenses and crediting their deposit account.

An audit nightmare, why, because an external auditor validates that the customer’s transactions on the statement are an exact match with the Bank’s GL account transactions.

This is not an audit nightmare. I am a licensed and practicing external auditor with a major US accounting firm; we deal with situations such as this almost everyday. This is what we would expect to see when auditing either a borrower or a lender. We do not expect two company’s books to be an exact match.

Now perhaps you would like to explain these two things:

I may not be reading that as intended, but it seems as if you are frustrated trying to understand the application. I know how you feel; with me it’s process costing (I still can’t do it by memory alone).

Like I said, I’m happy to continue the discussion if you feel it will help, but we’ve gone from a specific user’s issue to broad principles of debt transactions; we are beyond scope. Just message me directly. Until then, stay healthy and safe!

[generalegend]

@p4unger

Your loan does not actually increase because of interest and the fee

It surely does if you omit to make a repayment. Banks will then capitalise that interest and fees and charge interest on the increased amount as if it was principal.

@p4unger

the interest and fee are expenses, not changes to the loan

The interest and fee are expenses, correct, but they are also changes (or charges, additions) to the loan, again, especially if you omit to make a repayment.

@p4unger

interest charged to customers is operating revenue, ASC 230

If you mean that interest charged to customers is Cash Flow attributable to operating activities, that is correct for banks, but so is reduction of loan principal for banks, making it unnecessary to separate interest and fees from their loan sub ledger. Of course, for the borrower, all these items are financing activities in terms of cash flow.

@p4unger

Like I said, I’m happy to continue the discussion if you feel it will help, but we’ve gone from a specific user’s issue to broad principles of debt transactions; we are beyond scope.

You have taken it beyond scope by making confusing statements and presenting unsubstantiated spreadsheet examples that may or may not be correct as to how banks arrange their general ledger (I suspect incorrect). And now you want to have a private discussion? @Brucanna as a moderator was right to challenge you on statements that are confusing to users and not necessarily correct or helpful.

This should stay in the open forum because users need to be informed of viewpoints that are presented in this forum that may not be valuable for their purposes, no matter how authoritative they may seem.