Accounting question: loans to someone else

[Maf. King]

On Sunday 10 Jul 2005 09:29, Beth Leonard wrote:
> Hi,

Hi Beth,

>
> I'm sure an accountant would think the answer to this is simple, but
> I can't figure it out.  How does one account for a loan given to
> someone else?
>

Well, IANAA, but as far as i am aware, you treat a loan you have "supplied" 
exactly the same as a loan you have "received" (which crops up on the list 
every so often) - except liability becomes asset, and interest is income not 
expense.

> So far when I deposit the checks, I've just been using
> "income:loan repayment" and I have an asset account for the loan
> which was originally a transfer from checking.  However, I know
> the loan asset is decreasing over time, one day it will be
> all paid off and will no longer be an asset that I can expect
> income from.
>

Loan repayments are not income. you should see a transfer from checking -> 
asset:loan (ie decreasing the total loan outstanding).

Remember, your checking account is actually a "loan to the bank" - your money 
that someone else is looking after.  you wouldn't think of a withdrawal an an 
ATM as income - it is already your money!

> Here's the variables to work with:
> Loan Amount (how much I gave them to begin with)
> Total Loan Repayment (how much I will get back eventually)
> Yearly Payment (money they pay to me each year)
>
> Clearly the Loan Amount comes from Checking, and the Yearly Payment
> goes to checking, but I'm having trouble figuring out how and where
> to put the interest, to cover the fact that the total amount repaid
> is more than the amount borrowed.  I don't mind doing calculations
> by hand for the amounts, but what are the transfer accounts?
>

A split transaction to give:
Checking -> Asset:loan  (the repayment)
Checking -> income:loanInterest  (the "earned" interest)


> If the interest rate is fixed, how do I calculate the book value of
> the loan if I were to "sell" the right to receive future payments
> to someone else?  Actually, that's not quite the question I want
> to ask because I know I can calculate that.  What I really want to
> know is how can I make regular transactions such that in my
> balance sheet under Assets, the "sell value" is reflected in
> the balance sheet, not the original value of the loan.
>

If the asset:loan account is decreasing over time as repayments are made, will 
that give you the figure you require?  I'm not at all sure how to work out 
the "resale" value of a loan!

HTH,
Maf.