personal loan to friend, unpaid accumulating interest account

[Phil Longstaff]

Technically, if you are a business, then if the loan is defaulted on, the unpaid interest is still income and is taxable.  However, when the default happens, you can write off everything as a bad debt expense which should reduce taxes.  If this is for your personal accounting, then just handle it as Eric suggests (reduce the income).

Phil



________________________________
From: Eric Anopolsky <erpo41 at gmail.com>
To: Donald Coleman <don at coleman.org>
Cc: gnucash-user at gnucash.org
Sent: Tuesday, May 12, 2009 8:44:15 AM
Subject: Re: personal loan to friend, unpaid accumulating interest account

On Tue, 2009-05-12 at 10:50 +0200, Donald Coleman wrote:
> When one has made a loan, what account should source the unpaid interest?
> As long as payments are regularly made, which include the monthly 
> interest, there is no need for this.
> 
> But in this situation, payments are being skipped, so the loan balance 
> is increasing, as the unpaid interest is accumulating.   So from where 
> should I transfer "owed interest" into the loan balance?
> 
> So I have four accounts currently involved in this loan.
> 
> Assets:Current Assets: Bank
> Assets:Investments:Loan to Friend
> Income:Interest Income:Investments
> Unspecified
> 
> I would like gnucash to track accumulated unpaid interest.
> Currently I'm using the "Unspecified" account to be the source account 
> for this, but I think there should be a better account.
> 
> I shouldn't use an income account, because it's not income until the 
> loan is actually paid... 

It is income. Just because the balance owed to you by your friend is not
a very liquid asset does not mean that interest earned is not income. If
you were earning interest on a CD at a bank that you could not access
until a certain date, it would still be interest income.

If your friend later declares that he is defaulting on the loan and will
not make any more payments, you could make a reversing transaction to
put the unpaid interest back and reduce the balance of the income
account so that it reflects the income you've actually earned. Then you
could make a transfer from Assets:Investments:Loan to Friend to
Expenses:Bad Debt to dispose of the balance in that account.

Don't forget to charge interest on the unpaid interest. :)

You didn't ask, but in case you are interested there are services out
there that act as intermediaries for loans between friends and family
members. They can set up regular, direct withdrawals from the borrower's
bank account so that it's much harder to "skip" a payment.

Cheers,
Eric