personal loan to friend, unpaid accumulating interest account

[Laura Lincoln]

This is true only if you are an accrual based company. The concept of "Bad
debt" does not exist in a cash basis company.

You can't "write off" (as bad debt) something that you never "wrote on" (as
in claimed as an expense).

On Tue, May 12, 2009 at 9:27 AM, Phil Longstaff <plongstaff at rogers.com>wrote:

> 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
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