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

Posted by learnaccounting on January 27, 2008

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

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

Posted by learnaccounting on January 19, 2008

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:-


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