Good Day
I would like to ask how to record the purchasing a fixed property based on bank loan
let me explain; the property price is R 900,000.00 for which I will receive a bank loan, there are legal costs for the property which I will pay from the business account, the loan will be repaid over period of 240 months on monthly basis, the interest paid to the bank is deductible
what I know that this property will be an fixed asset with certain value (starting R 900,000.00) this property appreciates about 6% PA
Could anyone explain to me how to get all this into the manager? from the bank loan nothing will come to my account
I went through a similar thing myself a while ago. There may well be some accountants here who can be more specific and detailed about your jurisdiction, but this is how I did it, and for what it’s worth my accountant seems happy with my record-keeping in this regard.
Setup an account in balance-sheet Liabilities - ‘Bank Loan Account’
When the loan reaches you, enter it to that with the balancing entry to ‘Bank Account’
When the transaction for the purchase of the property arrives treated it like any other supplier invoice but analysed it to Fixed Asset Property Account, then pay that invoice as you would any other supplier.
At this point, nothing much has happened in a trading context, but your Liabilities have increased by the value of the loan, and your fixed asset value has increased by the value of the purchase price paid for the property.
Now, on an ongoing basis I make monthly payments to the lender. They are a fixed sum every month over the term of the loan. The make-up of those monthly payments is part capital repayment and part interest.
When I enter that, I treat it just like any other payment from the bank account, but analyse some to ‘Bank Interest Paid’ and some to ‘Bank Loan Account’. Over time the amount of capital owed diminishes reducing the liabilities, and the interest is simply a cost like any other cost.
The arithmetic employed is simple. Value of loan at the start divided by the number of months will equal the monthly capital portion to be allocated. The remainder of the re-payment will be allocated to interest paid.
I get a statement from the lender every six months and I find that it stays pretty much in sync’ with them, but if I do need to make an adjustment it is very small, and really not material to the overall picture.
Meanwhile, (I am in the UK by the way), we operate under an accounting system which requires us to periodically review and re-state asset values as required. This of course may or may not apply to your jurisdiction and you should therefore probably take advice about it, but every year we are compelled to get our assets independently valued. Any changes in value (up or down) are handled in a balance-sheet account called ‘revaluation reserve’ which basically is supposed to reflect the difference between the price paid for a property and what it might now be reasonably sold for if that were to happen. The mechanics of it also then get entered into an area of the Profit and loss accounts as what I might call here a ‘non-trading profit or loss’. It does not effect corporate taxation, or trading performance and is only really of any relevance if that property were to be sold or if one was trying to obtain a realistic valuation of the business as a whole.
I hope that I have been able to explain that clearly, but it does work for both myself and my accountant and works as an accurate way to record things.
Then you use a Journal Entry, Debit to the Fixed Asset and Credit to the “Balance Sheet Liabilities - ‘Bank Loan Account’” as suggested by @xero50.
Also, be sure you have read the Guide: Purchase fixed assets | Manager. All this is explained, including use of journal entries when loan proceeds do not come directly to you.