Various Types of Transactions – Part 5, Disbursement or Release of Principal Sum of Loans or Borrowings from Third Parties

Business entities may apply for loans or borrow money from third parties (usually financial institutions; sometimes in the form of short term loans or advances from owners, directors & etc.). THIS IS NOT A SOURCE OF REVENUE OR OTHER INCOME. This is because the pricipal sum borrowed is a liability (resource – money that you get from others temporarily and you need to pay a the price for this – interest). Upon fulfilling the terms and conditions set and agreement reached between the borrowers and the lenders, the principal sum of the loan will be realeased to the borrowers.

The double entry involved in the recording of the realease of the loan is as follows:-

	Balance Sheet		Income Statement
	DR	CR	DR	CR
Cash at bank	24,000
Loan from XXX Bank		24,000

A decision need to be made as to whether the loan should be classified as current liability or non-current liability. This involves “splitting” the loan into the current portion and non-current portion in accordance with the repayment terms. Some business entities do not split the loan into current and non-current since it received the realease of the loan, nor during the financial year. The splitting of the loan into current and non-current portion is done ONLY as at the end of the financial year for proper financial statements presentation purposes. This is achieved by way of a reclassification journal entry once the current portion and non-current portion of the loan is calculated (this must be reflective of the position of the loan to the business entities as at the end of the financial year).

Assume the $24,000 loan received from XXX Bank is repayable over 5 years with monthly principal repayment of $500 (the interest on loan is purposely omitted), and as at the end of the financial year, the balance of the loan is $19,500 (This means 9 installments of $500 have been repaid). The portion of the loan to be classified as current liability is $6,000 (i.e. the amount expected to be repaid over the next 12 months from the end of the financial year, $500 x 12 months). The non-current portion of the loan is therefore $13,500 ($19,500 – $6,000). Assume the Loan from XXX Bank was originally classified as a current liabilities account, the reclassification journal entry is:-

	Balance Sheet		Income Statement
	DR	CR	DR	CR
Loan from XXX Bank (Current liabilities)	13,500
Loan from XXX Bank (Non-Current liabilities)		13,500

Further Example

The financial period of ABC Co. Ltd. is from 1 January to 31 December. On 1 January 2006, ABC Co. Ltd receive $100,000 loan from Northern Bank upon approval of its application submitted earlier. Interest is charged at 7% per annum calculated monthly. Based on these terms, the repayment schedule is tabulated as follows:-

	B/F Principal Sum	Interest rate (7% / 12 months)	Interest per month	Repayment	Principal Sum Repaid	C/F Principal Sum
	A	B	C = A X B	D	E = D – C	F = A – E
1	100,000.00	0.005833	583.33	1,980.00	1,396.67	98,603.33
2	98,603.33	0.005833	575.19	1,980.00	1,404.81	97,198.52
3	97,198.52	0.005833	566.99	1,980.00	1,413.01	95,785.51
4	95,785.51	0.005833	558.75	1,980.00	1,421.25	94,364.26
5	94,364.26	0.005833	550.46	1,980.00	1,429.54	92,934.72
6	92,934.72	0.005833	542.12	1,980.00	1,437.88	91,496.84
7	91,496.84	0.005833	533.73	1,980.00	1,446.27	90,050.57
8	90,050.57	0.005833	525.29	1,980.00	1,454.71	88,595.86
9	88,595.86	0.005833	516.81	1,980.00	1,463.19	87,132.67
10	87,132.67	0.005833	508.27	1,980.00	1,471.73	85,660.95
11	85,660.95	0.005833	499.69	1,980.00	1,480.31	84,180.64
12	84,180.64	0.005833	491.05	1,980.00	1,488.95	82,691.69	6,451.69	interest paid in Year 1	17,308.31	principal repaid in Year 1
13	82,691.69	0.005833	482.37	1,980.00	1,497.63	81,194.06		C1 to C12		E1 to E12
14	81,194.06	0.005833	473.63	1,980.00	1,506.37	79,687.69
15	79,687.69	0.005833	464.84	1,980.00	1,515.16	78,172.53
16	78,172.53	0.005833	456.01	1,980.00	1,523.99	76,648.54
17	76,648.54	0.005833	447.12	1,980.00	1,532.88	75,115.66
18	75,115.66	0.005833	438.17	1,980.00	1,541.83	73,573.83
19	73,573.83	0.005833	429.18	1,980.00	1,550.82	72,023.01
20	72,023.01	0.005833	420.13	1,980.00	1,559.87	70,463.15
21	70,463.15	0.005833	411.04	1,980.00	1,568.96	68,894.18
22	68,894.18	0.005833	401.88	1,980.00	1,578.12	67,316.06
23	67,316.06	0.005833	392.68	1,980.00	1,587.32	65,728.74
24	65,728.74	0.005833	383.42	1,980.00	1,596.58	64,132.16	5,200.47	interest paid in Year 2	18,559.53	principal repaid in Year 2
25	64,132.16	0.005833	374.10	1,980.00	1,605.90	62,526.26		C13 to C24		E13 to E24
26	62,526.26	0.005833	364.74	1,980.00	1,615.26	60,911.00
27	60,911.00	0.005833	355.31	1,980.00	1,624.69	59,286.31
28	59,286.31	0.005833	345.84	1,980.00	1,634.16	57,652.15
29	57,652.15	0.005833	336.30	1,980.00	1,643.70	56,008.46
30	56,008.46	0.005833	326.72	1,980.00	1,653.28	54,355.17
31	54,355.17	0.005833	317.07	1,980.00	1,662.93	52,692.24
32	52,692.24	0.005833	307.37	1,980.00	1,672.63	51,019.61
33	51,019.61	0.005833	297.61	1,980.00	1,682.39	49,337.23
34	49,337.23	0.005833	287.80	1,980.00	1,692.20	47,645.03
35	47,645.03	0.005833	277.93	1,980.00	1,702.07	45,942.96
36	45,942.96	0.005833	268.00	1,980.00	1,712.00	44,230.96	3,858.80	Interest paid in Year 3	19,901.20	principal repaid in Year 3
37	44,230.96	0.005833	258.01	1,980.00	1,721.99	42,508.97		C25 to C36		E25 to E36
38	42,508.97	0.005833	247.97	1,980.00	1,732.03	40,776.94
39	40,776.94	0.005833	237.87	1,980.00	1,742.13	39,034.81
40	39,034.81	0.005833	227.70	1,980.00	1,752.30	37,282.51
41	37,282.51	0.005833	217.48	1,980.00	1,762.52	35,519.99
42	35,519.99	0.005833	207.20	1,980.00	1,772.80	33,747.19
43	33,747.19	0.005833	196.86	1,980.00	1,783.14	31,964.05
44	31,964.05	0.005833	186.46	1,980.00	1,793.54	30,170.51
45	30,170.51	0.005833	175.99	1,980.00	1,804.01	28,366.50
46	28,366.50	0.005833	165.47	1,980.00	1,814.53	26,551.97
47	26,551.97	0.005833	154.89	1,980.00	1,825.11	24,726.86
48	24,726.86	0.005833	144.24	1,980.00	1,835.76	22,891.10	2,420.14	Interest paid in Year 4	21,339.86	principal repaid in Year 4
49	22,891.10	0.005833	133.53	1,980.00	1,846.47	21,044.63		C37 to C48		E37 to E48
50	21,044.63	0.005833	122.76	1,980.00	1,857.24	19,187.39
51	19,187.39	0.005833	111.93	1,980.00	1,868.07	17,319.32
52	17,319.32	0.005833	101.03	1,980.00	1,878.97	15,440.35
53	15,440.35	0.005833	90.07	1,980.00	1,889.93	13,550.42
54	13,550.42	0.005833	79.04	1,980.00	1,900.96	11,649.46
55	11,649.46	0.005833	67.96	1,980.00	1,912.04	9,737.42
56	9,737.42	0.005833	56.80	1,980.00	1,923.20	7,814.22
57	7,814.22	0.005833	45.58	1,980.00	1,934.42	5,879.80
58	5,879.80	0.005833	34.30	1,980.00	1,945.70	3,934.10
59	3,934.10	0.005833	22.95	1,980.00	1,957.05	1,977.05
60	1,977.05	0.005833	11.53	1,988.58	1,977.05	0.00	877.48	Interest paid in Year 5	22,891.10	principal repaid in Year 5
								C49 to C60		E49 to E60
							18,808.58	Total interest paid	100,000.00	Total principal repaid

Assume ABC Co. Ltd. pays the installments on time

The double entries to record the transactions during the year ended 31 December 2006 are as follows:-

	Balance Sheet		Income Statement
	DR	CR	DR	CR
1 January 2006
Cash at bank	100,000
Loan from Northern Bank		100,000
31 January 2006
Loan from Northern Bank	1,396.67
Interest expense			583.33
Cash at bank		1,980
(Please refer to instalment No. 1 of the repayment schedule)
28 February 2006
Loan from Northern Bank	1,404.81
Interest expense			575.19
Cash at bank		1,980
(Please refer to instalment No. 2 of the repayment schedule)
31 March 2006
Loan from Northern Bank	1,413.01
Interest expense			566.99
Cash at bank		1,980
(Please refer to instalment No. 3 of the repayment schedule)
30 April 2006
Loan from Northern Bank	1,421.25
Interest expense			558.75
Cash at bank		1,980
(Please refer to instalment No. 4 of the repayment schedule)
31 May 2006
Loan from Northern Bank	1,429.54
Interest expense			550.46
Cash at bank		1,980
(Please refer to instalment No. 5 of the repayment schedule)
30 June 2006
Loan from Northern Bank	1,437.88
Interest expense			542.12
Cash at bank		1,980
(Please refer to instalment No. 6 of the repayment schedule)
31 July 2006
Loan from Northern Bank	1,446.27
Interest expense			533.73
Cash at bank		1,980
(Please refer to instalment No. 7 of the repayment schedule)
31 August 2006
Loan from Northern Bank	1,454.71
Interest expense			525.29
Cash at bank		1,980
(Please refer to instalment No. 8 of the repayment schedule)
30 September 2006
Loan from Northern Bank	1,463.19
Interest expense			516.81
Cash at bank		1,980
(Please refer to instalment No. 9 of the repayment schedule)
31 October 2006
Loan from Northern Bank	1,471.73
Interest expense			508.27
Cash at bank		1,980
(Please refer to instalment No. 10 of the repayment schedule)
30 November 2006
Loan from Northern Bank	1,480.31
Interest expense			499.69
Cash at bank		1,980
(Please refer to instalment No. 11 of the repayment schedule)
31 December 2006
Loan from Northern Bank	1,488.95
Interest expense			491.05
Cash at bank		1,980
(Please refer to instalment No. 12 of the repayment schedule)

The relevant “T” accounts shown below provide a clearer picture of the figures involved in respect of the release of loan and the repayments recorded during the year ended 31 December 2006:-

ABC Co. Ltd
General Ledger
Loan From Northern Bank (Balance Sheet)
DEBIT				CREDIT
Date	Descriptions	Folio	$	Date	Descriptions	Folio	$
2006				2006
31-Jan	Cash at bank		1,396.67	01-Jan	Cash at bank		100,000.00
28-Feb	Cash at bank		1,404.81
31-Mar	Cash at bank		1,413.01
30-Apr	Cash at bank		1,421.25
31-May	Cash at bank		1,429.54
30-Jun	Cash at bank		1,437.88
31-Jul	Cash at bank		1,446.27
31-Aug	Cash at bank		1,454.71
30-Sep	Cash at bank		1,463.19
31-Oct	Cash at bank		1,471.73
30-Nov	Cash at bank		1,480.31
31-Dec	Cash at bank		1,488.95
31-Dec	Balance C/F		82,691.68
			100,000.00				100,000.00
Cash at bank (Balance Sheet)
DEBIT				CREDIT
Date	Descriptions	Folio	$	Date	Descriptions	Folio	$
2006				2006
01-Jan	Balance B/F		5,467.98	31-Jan	Loan from Northern Bank		1,396.67
01-Jan	Cash at bank		100,000.00	31-Jan	Interest expense		583.33
				28-Feb	Loan from Northern Bank		1,404.81
				28-Feb	Interest expense		575.19
				31-Mar	Loan from Northern Bank		1,413.01
				31-Mar	Interest expense		566.99
				30-Apr	Loan from Northern Bank		1,421.25
				30-Apr	Interest expense		558.75
				31-May	Loan from Northern Bank		1,429.54
				31-May	Interest expense		550.46
				30-Jun	Loan from Northern Bank		1,437.88
				30-Jun	Interest expense		542.12
				31-Jul	Loan from Northern Bank		1,446.27
				31-Jul	Interest expense		533.73
				31-Aug	Loan from Northern Bank		1,454.71
				31-Aug	Interest expense		525.29
				30-Sep	Loan from Northern Bank		1,463.19
				30-Sep	Interest expense		516.81
				31-Oct	Loan from Northern Bank		1,471.73
				31-Oct	Interest expense		508.27
				30-Nov	Loan from Northern Bank		1,480.31
				30-Nov	Interest expense		499.69
				31-Dec	Loan from Northern Bank		1,488.95
				31-Dec	Interest expense		491.05
				31-Dec	Balance C/F		81,707.98
			105,467.98				105,467.98
Interest expense (income statement)
DEBIT				CREDIT
Date	Descriptions	Folio	$	Date	Descriptions	Folio	$
2006				2006
31-Jan	Interest expense		583.33	31-Dec	To income statement		6,451.68
28-Feb	Interest expense		575.19
31-Mar	Interest expense		566.99
30-Apr	Interest expense		558.75
31-May	Interest expense		550.46
30-Jun	Interest expense		542.12
31-Jul	Interest expense		533.73
31-Aug	Interest expense		525.29
30-Sep	Interest expense		516.81
31-Oct	Interest expense		508.27
30-Nov	Interest expense		499.69
31-Dec	Interest expense		491.05
			6,451.68				6,451.68

 Before the income statement and balance sheet of ABC Co. Ltd. are finalized, a reclassification journal entry is required to present correctly the current portion and non-current portion of the Loan from Northern Bank. From the “T” account shown above, the outstanding amount of Loan from Northern Bank as at 31 December 2006 was $82,691.68 (31-Dec Balance C/F). From the loan repayment schedule, the principal sum expected to be repaid in Year 2 is $18,559.53. This is the portion of the loan expected to be repaid within 12 months from the year end i.e. 31 December 2006 and therefore should be presented as a current liabilities item. The non-current portion of the loan is calculated as follows:-

Principal sum outstanding as at 31 December 2006	82,691.68
Principal sum expected to be repaid in the next 12 months	(18,559.53)
Principal sum expected to be repaid after the next 12 months	64,132.15

Assume the Loan from Northern Bank was originally classified as a current liabilities account, the following reclassification journal entry is required to reflect correctly the current portion and the non-current portion of the loan on the balance sheet:-

	Balance Sheet		Income Statement
	DR	CR	DR	CR
Loan from Northern Bank (Current liabilities)	64,132.15
Loan from Northern Bank (Non-Current liabilities)		64,132.15

The income statement and balance sheet of ABC Co. Ltd. after the above transactions being recorded in the respective accounts and also the impact of the $64,132.15 reclassification journal entry are as follows: –

Income Statement and Balance Sheet of ABC Co. Ltd.
Income Statement for the year ended 31 December 2006
	BEFORE	Adjustment		AFTER
		DR	CR
	$			$
Sales	109,270.00			109,270.00
Cost of Sales	– 40,875.00			– 40,875.00
Gross profit	68,395.00			68,395.00
Other income: –
Rental income	12,000.00			12,000.00
Operating expenses: –
Accountancy fee	– 800.00			– 800.00
Depreciation of property, plant and equipment	– 4,400.00			– 4,400.00
Donation	– 500.00			– 500.00
Electricity & water	– 3,340.00			– 3,340.00
Interest expense	– 6,451.68			– 6,451.68
Printing & stationery	– 1,697.00			– 1,697.00
Rental of premises	– 12,000.00			– 12,000.00
Salaries	– 27,865.00			– 27,865.00
Upkeep of office	– 3,547.00			– 3,547.00
Telephone charges	– 1,285.00			– 1,285.00
Travelling, petrol & toll charges	– 2,648.00			– 2,648.00
	– 64,533.68			– 64,533.68
Net profit for the year	15,861.32			15,861.32
Retained profits B/F	27,654.00			27,654.00
Retained profits C/F	43,515.32			43,515.32
Balance Sheet as at 31 December 2006
	$			$
Non-current assets
Property, plant and equipment	19,600.00			19,600.00
Current assets
Inventories	5,000.00			5,000.00
Trade receivables	32,807.00			32,807.00
Other receivables, deposits & prepayments:
Rental receivable	3,000.00			3,000.00
Rental deposit	3,000.00			3,000.00
Utility deposit	500.00			500.00
Cash and bank balances	105,467.98			105,467.98
	149,774.98			149,774.98
Current liabilities
Trade payables	– 3,588.00			– 3,588.00
Other payables and accruals	– 24,579.98			– 24,579.98
Loan from Northern Bank	– 82,691.68	64,132.15		– 18,559.53
	– 110,859.66			– 43,139.51
Net current assets	38,915.32			106,635.47
	58,515.32			126,235.47
Financed by: –
Share capital	15,000.00			15,000.00
Retained profits	43,515.32			43,515.32
	58,515.32			58,515.32
Non-current Liabilities
Loan from Northern Bank	–		64,132.15	64,132.15
	58,515.32			122,647.47

Various Types of Transactions – Part 4, Collection from Other Source of Revenue and Income

As mentioned in my post: Various Types of Transactions – Part 1, Introduction, there were 5 examples of other source of revenue or income highlighted – interest income, dividend income, rental income, proceeds from disposal of assets and compensation received for loss of assets. Please take note that this is not an exhaustive list as there are more types of other source of revenue and income not mentioned. For the purpose of easy understanding and simplicity, I will only discuss these 5 different other source of revenue and income in the following posts:-

• Various Types of Transactions – Part 4a, Collection from Other Source of Revenue and Income (Interest Income)
  
• Various Types of Transactions – Part 4b, Collection from Other Source of Revenue and Income (Dividend Income)
  
• Various Types of Transactions – Part 4c, Collection from Other Source of Revenue and Income (Rental Income)
  
• Various Types of Transactions – Part 4d, Collection from Other Source of Revenue and Income (Proceeds from Disposal of Assets)
  
• Various Types of Transactions – Part 4e, Collection from Other Source of Revenue and Income (Compensation Received for Loss of Assets)