I made new loan accounts, under LIABILITIES, to record the company’s car leasing payment. I create payments by issuing PURCHASE INVOICE and directly allocate them to this accounts.
But I realize now that the numbers are now automatically negative by system under LIABILITIES (SUMMARY). It is thus decreasing the LIABILITIES instead of increasing it.
What did I do wrong?
That is happening because you are not using purchase invoices correctly. A purchase invoice is used when a supplier invoices you, creating an obligation, called an account payable, which you intend to pay in the future. This liability lessens your equity and shows up in Accounts payable. But the purchase invoice does not record money leaving the company and going to the lessor. As you are doing things, you are creating two liabilities for the same thing: the so-called loan account and the account payable.
Your lease payments are direct expenditures and should be recorded using Spend Money from a bank or cash account, allocating the payment directly to what you call the loan account . There is actually no need to use a purchase invoice at all.
By the way, the lease obligation is not technically a loan, since the lessor has not given or allowed you the use of money. I would record this obligation only if you are using accrual-basis accounting, not if you are doing cash-basis accounting. And I would name it something like Lease Contract. On the other hand, if you have the freedom to return the leased car at will, I would not record the obligation at all. In that situation, the lease payment is no different from the monthly utility bill, just an ongoing expense, but with no claim on the company’s equity.
Thank you for your quick reply Tut. I am fully aware about the <img Accounts Payable logic, basic accounting principle.
The Car Lease is a Financial Lease (the vehicles become the company assets) not an Operational Lease. The accountant and tax authority in Indonesia would like to see these loan on separate account in the Balance Sheet.
I have done as you pointed out, not using purchase invoice, allocating payment directly, yet the result are still the same. Negative number are still shown
See screen shots below: accounts# 260-281
For a Finance Lease you need to know the asset value and the total amount of the lease payments. The basic way where the asset value is 8,160, the lease is 200/mth for 4 yrs giving a total of 9600.
The initial setting up journal entry would be this if you are using the Fixed Assets tab
Debit - Fixed Asset - (Motor Vehicle Description) 8160
Debit - Current Asset - Lease Finance Cost 1440
Credit - Current Liabilities - Lease XYZ 9600
When you make a lease payment - Bank Account Spend Money, Line Item Lease XYZ 200. This Debit will reduce the Lease XYZ account
If you are manually entering the payment (not using Bank Rules) then at the same time you could transfer the Lease Finance Cost to the P&L - Bank Account Spend Money, First Line Item Lease XYZ 200, Second Line Item Lease Finance Cost -30 (note the minus sign), Third Line Item P&L Interest Expense 30 - Total still equals 200.
The vehicle is depreciated normally.
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Thank you Brucann
Yes, had I known you were acquiring the vehicle, I would have mentioned the Fixed Assets involvement. I interpreted your comment as though you were handling an operational lease.
Either way, your main trouble came from trying to record the payment through a purchase invoice rather than through the Spend Money function.
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I still get the negative figures on liability though
As you seem to know, liability accounts normally have credit balances, so they are subtracted from assets to yield equity. By convention, however, they are shown on balance sheets as positive numbers. We know they must be subtracted because of the heading. Manager follows this convention. So when we enter a liability amount, we do so as a positive number.
Drill down into one of the negative liability lease accounts by clicking on its balance in the Summary. You should see every transaction that has gone into making up the balance. Everything that increases the liability should show as a positive number. Payments that decrease the liability should show in red as negative numbers. If this is not the way you are seeing things, you are entering something incorrectly.
If I understand your description of what you are trying to record correctly, the initial lease should be positive. Your payments through Spend Money should be negative, since they reduce the liability. But if you recorded those payments as purchase invoices, they will increase the liability. You should be able to troubleshoot your problem by scanning the ledger for the individual leases.
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I am still tinkering… will update you accordingly
@Tut After tinkering several times, i.e. not issuing purchase invoice but making payment instead, it works! Thanks a lot. It was because of the build in account that automatically subtract I presume (just like the accumulate depreciation buit-in account which i will ask on separate subject)
Apologized for ‘activiting’ this thread again. I have got a similar query about leasing. I engaged a leasing company (A) to finance my equipment supplied by a company (B) to run my business. The leasing contract was signed on the 1 Jan. As part of the agreement i have to pay an upfront a 2 months instalment until the B successfully install the equipment in my business premise and functional. B successfully install their equipment and the equipment started operational on 30 June. As of July, A has asked me to start servicing my lease…
how do I put this all down in my accounts?
Eg:
Lease - 5000
Instalment - 100/ month
Tenure : 5 years
Agreement processing fee - 50 (one time)
Insurance - 100/ year
Is it a Operating Lease (you don’t own the asset until the end) or Finance Lease (where you own the asset from the start).
If its an Operating Lease - just Spend Money and expense the items as they occur.
If its an Finance Lease - do the following
The initial setting up journal entry would be this if you are using the Fixed Assets tab
Debit - Fixed Asset - (equipment description) - 5000
Debit - Current Asset - Unpaid Finance Cost - 1000
Credit - Current Liabilities - Company A - 6000 (100 x 12 x 5)
For each Instalment payment - Spend Money
First Account line - Company A - 100,
Second Account line - Unpaid Finance Cost : -16.66 (note the minus sign),
Third Account line - P&L Interest Expense 16.66 (note final month would be 17.06)
Total still equals 100.
For the processing fee and insurance - expense them as they occur
The equipment is also depreciated normally