Bill Jacqmein 401K loan

[brydone at btinternet.com]

If the loan is for principal only, I think the simplest entries are this
when setting up your account:

Loan Account  Cr401,000 (owing your lender)

Bank Account         Dr 401,000 (putting money into your account from
lender)
------------------------------------
That's the set up of the loan.

Repayment of loan: principal and interest

Amounts: (Examples)

Principal Repayments say over 20 years-example 20,050
Interest payments say 5% on opening balance per annum  20,050

(Check with lender on both actual interest and principal payments to be
recorded over period in your accounts, as they can vary depending on the
type of loan and interest rate)

Transaction in text:

To reduce the amount of loan you have outstanding, you take money out of
your bank account, to pay for it,therefore you reduce surplus cash in
your account, or if your like me increase your overdraft, in paying that
amount you reduce the amount you owe on your liability, so the liability
is decreased by the amount you pay to it.

 
Therefore the transaction for repaying your annual, or whatever it is
principal installment is as follow

Principal Payment:
                   Cr        Dr
Bank Account   20,050
Loan Account             20,050

For recording the interest payment on the loan at say 5% or 20,050

                          Dr       Cr
Interest Expense       20,050   
Bank Account                    20,050

However, if the loan of 401,000 is inclusive of interest, then you have
to seperate principal from interest, and do some sort of fancy
calculation,for annual interest cost, and if the interest is calculated
on the average amount of loan outstanding over the period you are
looking at , say a year, you also have to do some sort of fancy
calculation to calculate it, and in either way, what I would do is check
up with your lender on the breakdown between  the principal and
interest, to be paid each period, as if my memory serves me correct the
calculations can be a bit complex, depending on the kind of loan.

But notwithstanding the specific amounts of both interest and principal
repayments, the entries in all cases are the same.

Concerning your asset account.

I think it should've  been set up as follows:
                      Dr      Cr
Asset Purchased : 401,000
Bank Account               401,000

You take money out of your bank account,(Cr) after you received the
money from your lender which you put into your account(Dr) (hence the
debit above in the opening loan set up transaction) with which to pay
for your asset, and then you bring into your company, the asset you buy
with it,a new (Dr) so for the money out your bank account asset, you
have a new asset to account for taking it out, essentially, the equation
is, what goes down must make something go up.

The repaying of the loan, has absolutely nothing to do with the thing
you bought, that is now yours in theory and is in no way connected to
any transactions you may have with your lender, if it isn't a lease or
HP or something like that, but that opens up a whole new ball game, and
doesn't seem to be what your query is about.

I hope that makes sense.

Douglas