loan assignment double entry

Basic Procedures
Software Choices
Start Bookkeeping Biz
Single Entry
Double Entry
Bookkeeping Terms
Tests/Quizzes
Profit Loss
Balance Sheet
Excel Templates
Printable Forms
Receipt Forms
Site Search
Privacy Policy
Affiliate Disclosure
Refund Policy
Double Entry Bookkeeping

Loan Journal Entry

How to do journal entries for loan transactions.

A loan journal entry can be recorded in different ways in bookkeeping software, here are three of them:

A direct entry: where your software or bookkeeping system allows you to add a loan journal entry.
Through a bank transaction reconciliation: where you allocate the bank transaction fed into your software to the loan account and the double-entry journal is processed in the “background” of the software.
Using the invoicing/billing features of bookkeeping software: to record the acquiring of the loan itself, or the purchase of the asset and once again the journal entry is processed in the “background”.

Contents: Bank Loans Loan Interest Payable Car Loans Intercompany loans Loan forgiveness

What does a loan journal entry do?

When you use bookkeeping software you don't usually see the automatic journal entries that happen in the "background" when reconciling your bank accounts.

Entering a manual journal is handy for adjusting your books without affecting the bank accounts, like when you need to move a transaction from one account category to another like with the loan forgiveness.

The examples on this page are for both automatic journals involving the bank account and for manual entering of journals.

Every loan journal entry adjusts the value of a few account categories on the general ledger .

The account categories are found in the chart of accounts .

Depending on the type of ledger account the bookkeeping journal will increase or decrease the total value of each account category using the debit or credit process.

bank loan Received journal entry

Bank loans enable a business to get an injection of cash into the business.

This is usually the easiest loan journal entry to record because it is simply receiving cash, then later adding in the monthly interest and making a regular repayment.

bank loan received journal entry

Debit : Bank Account (asset account ) Credit : Loan ( liability account )

Bank loan repayment journal Entry

Debit : Loan (liability account ) Credit : Bank ( asset account )

To learn more about assets and liabilities go to accounting balance sheet .

The figures from the above examples are based on the figures in the Loan Amortization image in the next section about loan interest.

loan interest payable journal entry

Adding interest to the loan account.

Debit : Loan Interest (expense account ) Credit : Loan ( liability account )

The bank may be able to provide a schedule listing all expected repayment dates and amounts for the life of the loan.

If you are unable to get a schedule from the bank you may be able to see the amount of interest in the online bank transactions or off your loan statement for the current or previous months.

You can also find a Loan Amortization template in Microsoft Excel templates and enter the loan details from the bank to calculate your own schedule as in this example:

If you use a schedule like this, compare it to your loan account each month to ensure it is tracking as expected.

car loan journal entry

A car is an asset so the journal entry for it will be similar for the purchase-via-loan of other assets like workshop equipment.

The difference between bank loans and vehicle loans is that:

with bank loans the business receives actual money into the bank account and
with the vehicle loan the money is usually paid directly to the car sales company so the business doesn’t handle the money.

These car journal entries are for a vehicle costing $15,000 and for a loan of 5 years at 12% with fortnightly payments – calculated using the same Loan Amortization template mentioned above.

Purchase of Car Journal Entry

This example is based on the purchase of a car from a car sales business, which business signs you up with a loan provider. They will give you an invoice for the car and documents for the loan so you can get the information you need from those documents.

The first journal is to record the invoice for the purchase of the car.
The second journal is to pay off the invoice with the loan.
The third journal adds the loan interest to the loan.
The fourth journal records a repayment of the loan.

Debit : Vehicle (asset account ) Credit : Accounts Payable ( liability account )

Using the Accounts Payable account in the above journal entry means that the invoice has not been paid with your bank funds.

The loan will offset the Accounts Payable and you will monitor the balance owing through the loan liability account, not through the accounts payable account.

car loan Journal Entry

Two accounts are debited on this loan journal entry:

Debit : Accounts Payable (asset account ) , Debit : Administration Costs (expense account ) - shows on the Profit and Loss report Credit : Vehicle Loan Account ( liability account )

Loans usually come with some kind of administration cost so this has been included in the journal. This type of cost is a deductible business expense.

Vehicle Loan Interest Payable and Repayment of Loan

Debit : Loan Interest Expense (expense account ) Credit : Vehicle Loan ( liability account )

Debit : Vehicle Loan ( liability account ) Credit : Bank (asset account )

intercompany Loan Journal Entry

These journals occur when two or more businesses are owned by the same owner/s.

If one business is low on funds the owner might use funds from the other business bank account to pay bills due to stakeholders (vendors) or for other expenses.

Sometimes, the owner might transfer a lump sum from one business to the other for the same purpose - there may be a loan agreement drawn up or there may not be.

I am working with two types of transactions:

The first intercompany journals are for everyday expenses paid for one business by the other business.
The second intercompany journals are for a cash loan from one business to the other.

The two companies in this example are:

Designer Doors

These are purely fictional names not based on any real business that I know about.

1. Intercompany Everyday Expenses

Best Boots buys an office printer for Designer Doors for $220.00.

a. The loan journal entry in best boots is:

Debit : Designer Doors Loan Receivable ( asset * account ) Credit : Bank (asset account )

*This loan entry goes to assets because cash is expected to be received into the bank.

b. The loan journal entry in Designer doors is:

This journal puts the printer into the Profit and Loss Report of Designer Doors but shows that it was paid for by Best Boots.

Debit : Office Equipment ( expense account ) Credit : Best Boots Loan Payable (liability account )

There is no bank account involved in this journal.

Repaying the Intercompany Expenses Loan

Whether this is paid in full or only partly paid, the journal is the same:

The repayment of the expense loan by Designer Doors out of their bank account to Best Boots:

Debit : Best Boots Loan Payable ( liability account ) Credit : Bank (asset account )

The repayment of the expense loan into Best Boot's bank account:

Debit : Bank (asset account ) Credit : Designer Doors Loan Receivable ( asset account )

2. Intercompany Cash Loan

This is for a straight transfer of cash of $1,200 to from Best Boots to Designer Doors without a loan agreement and without interest; the business owner decides to repay it with $300 per month for 4 months.

A. The Cash Loan Journal Entry In Best Boots Is:

Debit : Designer Doors Loan Receivable ( asset account ) Credit : Bank (asset account )

A. The Cash Loan Journal Entry In Designer Doors Is:

Debit : Bank (asset account ) Credit : Best Boots Loan Payable ( asset account )

Loan forgiveness journal entry

This was a question that was emailed to me on how to account for a PPP Loan Forgiveness.

I am using this article by Stambaughness.Com for the basis of a PPP loan forgiveness, but these examples will work with most any type of loan forgiveness.

There are two different scenarios - you must chose one:

putting the full amount to Other Income (which increases your profit by increasing Income)
offsetting the loan to Expenses (which increases your profit by reducing expenses gradually over time).

My example is for a loan of $3,000 which was originally allocated to the Loan liability account.

Scenario 1: allocating the amount to Other Income

The aim here is to move the loan away for the full $3,000 from the balance sheet liability to Other Income on the Profit and Loss.

Result: This will show an extra profit of $3,000 in the month you have chosen to record the loan forgiveness.

Scenario 2: offsetting the amount to Expenses

The aim here is to move the loan away gradually from the Balance Sheet liability to the Profit and Loss Report by offsetting the cost of relevant expenses as they occur.

This does two things:

Decreases the loan owing on the balance sheet
Decreases the expense on the profit and loss report – which increases the overall profit

Every time you pay for an expense in whatever month that the loan is allowed to offset, do the above steps until the loan is back down to 0.00.

In the example journal, $1,000 has been offset to wages. For this fictitious business it may be that another $1,000 is offset in the next month, and then again in a third month, finally showing a nil loan balance on the balance sheet.

Result: this provides a more balanced approach to increasing monthly profit results rather than a wham of $3,000 in one month like Scenario 1.

Share this page

Facebook Comments

Site Sponsors

From The Blog

Types of Bookkeeping Accounts Used To Organize Income and Expenses

Nov 21, 23 08:10 PM

Importance of a Bookkeeping System - 9 Key Reasons

Oct 18, 23 10:04 PM

Best Business Bookkeeping Software Choices

Sep 13, 23 10:20 PM

Business Bookkeeping Software Blog Image

BLOG CONTACT SITE MAP PRIVACY AFFILIATE DISCLOSURE DISCLAIMER

by SARAH BOOYSEN

Beginner-bookkeeping.com does not sell any personal information. Check the P rivacy Policy

Receivables
Notes Receivable
Credit Terms
Cash Discount on Sales
Accounting for Bad Debts
Bad Debts Direct Write-off Method
Bad Debts Allowance Method
Bad Debts as % of Sales
Bad Debts as % of Receivables
Recovery of Bad Debts
Accounts Receivable Aging
Assignment of Accounts Receivable
Factoring of Accounts Receivable

Assignment of accounts receivable is an agreement in which a business assigns its accounts receivable to a financing company in return for a loan. It is a way to finance cash flows for a business that otherwise finds it difficult to secure a loan, because the assigned receivables serve as collateral for the loan received.

By assignment of accounts receivable, the lender i.e. the financing company has the right to collect the receivables if the borrowing company i.e. actual owner of the receivables, fails to repay the loan in time. The financing company also receives finance charges / interest and service charges.

It is important to note that the receivables are not actually sold under an assignment agreement. If the ownership of the receivables is actually transferred, the agreement would be for sale / factoring of accounts receivable . Usually, the borrowing company would itself collect the assigned receivables and remit the loan amount as per agreement. It is only when the borrower fails to pay as per agreement, that the lender gets a right to collect the assigned receivables on its own.

The assignment of accounts receivable may be general or specific. A general assignment of accounts receivable entitles the lender to proceed to collect any accounts receivable of the borrowing company whereas in case of specific assignment of accounts receivable, the lender is only entitled to collect the accounts receivable specifically assigned to the lender.

The following example shows how to record transactions related to assignment of accounts receivable via journal entries:

On March 1, 20X6, Company A borrowed $50,000 from a bank and signed a 12% one month note payable. The bank charged 1% initial fee. Company A assigned $73,000 of its accounts receivable to the bank as a security. During March 20X6, the company collected $70,000 of the assigned accounts receivable and paid the principle and interest on note payable to the bank on April 1. $3,000 of the sales were returned by the customers.

Record the necessary journal entries by Company A.

Journal Entries on March 1

Initial fee = 0.01 × 50,000 = 500

Cash received = 50,000 – 500 = 49,500

The accounts receivable don't actually change ownership. But they may be to transferred to another account as shown the following journal entry. The impact on the balance sheet is only related to presentation, so this journal entry may not actually be passed. Usually, the fact that accounts receivable have been assigned, is stated in the notes to the financial statements.

Journal Entries on April 1

Interest expense = 50,000 × 12%/12 = 500

by Irfanullah Jan, ACCA and last modified on Oct 29, 2020

All Chapters in Accounting

Intl. Financial Reporting Standards
Introduction
Accounting Principles
Business Combinations
Accounting Cycle
Financial Statements
Non-Current Assets
Fixed Assets
Investments
Revenue Recognition
Current Assets
Inventories
Shareholders' Equity
Liability Accounts
Accounting for Taxes
Employee Benefits
Accounting for Partnerships
Financial Ratios
Cost Classifications
Cost Accounting Systems
Cost Behavior
CVP Analysis
Relevant Costing
Capital Budgeting
Master Budget
Inventory Management
Cash Management
Standard Costing

Current Chapter

XPLAIND.com is a free educational website; of students, by students, and for students. You are welcome to learn a range of topics from accounting, economics, finance and more. We hope you like the work that has been done, and if you have any suggestions, your feedback is highly valuable. Let's connect!

Search Search Please fill out this field.

What Is Double Entry?

Understanding double entry, types of business accounts, the double-entry accounting system, the bottom line.

Corporate Finance

Double Entry: What It Means in Accounting and How It's Used

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

Amanda Bellucco-Chatham is an editor, writer, and fact-checker with years of experience researching personal finance topics. Specialties include general financial planning, career development, lending, retirement, tax preparation, and credit.

Accounting Explained With Brief History and Modern Job Requirements
Accounting Equation
Current and Noncurrent Assets
Accounting Theory
Accounting Principles
Accounting Standard
Accounting Convention
Accounting Policies
Principles-Based vs. Rules-Based Accounting
Accounting Method
Accrual Accounting
Cash Accounting
Accrual Accounting vs. Cash Basis Accounting
Financial Accounting Standards Board (FASB)
Generally Accepted Accounting Principles (GAAP)
International Financial Reporting Standards (IFRS)
IFRS vs. GAAP
US Accounting vs. International Accounting
Understanding the Cash Flow Statement
Breaking Down The Balance Sheet
Understanding the Income Statement
Financial Accounting
Financial Accounting and Decision-Making
Financial vs. Managerial Accounting
Cost Accounting
Certified Public Accountant (CPA)
Chartered Accountant (CA)
Accountant vs. Financial Planner
Tax Accounting
Forensic Accounting
Chart of Accounts (COA)
Double Entry CURRENT ARTICLE
Closing Entry
Introduction to Accounting Information Systems
Inventory Accounting
Last In, First Out (LIFO)
First In, First Out (FIFO)
Average Cost Method

Double entry is a bookkeeping and accounting method, which states that every financial transaction has equal and opposite effects in at least two different accounts. It is used to satisfy the accounting equation :

Assets = Liabilities + Equity \begin{aligned} &\text{Assets} = \text{Liabilities} + \text{Equity} \\ \end{aligned} Assets = Liabilities + Equity

With a double-entry system, credits are offset by debits in a general ledger or T-account .

Key Takeaways

Double entry refers to an accounting concept whereby assets = liabilities + owners' equity.
In the double-entry system, transactions are recorded in terms of debits and credits.
Double-entry bookkeeping was developed in the mercantile period of Europe to help rationalize commercial transactions and make trade more efficient.
The emergence of double entry has been linked to the birth of capitalism.

Investopedia / Jessica Olah

In accounting, a credit is an entry that increases a liability account or decreases an asset account. A debit is the opposite. It is an entry that increases an asset account or decreases a liability account. In the double-entry accounting system, transactions are recorded in terms of debits and credits. Since a debit in one account offsets a credit in another, the sum of all debits must equal the sum of all credits.

The double-entry system of bookkeeping standardizes the accounting process and improves the accuracy of prepared financial statements, allowing for improved detection of errors. All types of business accounts are recorded as either a debit or a credit.

Bookkeeping and accounting are ways of measuring, recording, and communicating a firm's financial information. A business transaction is an economic event that is recorded for accounting/bookkeeping purposes. In general terms, it is a business interaction between economic entities, such as customers and businesses or vendors and businesses.

Under the systematic process of accounting, these interactions are generally classified into accounts. There are seven different types of accounts that all business transactions can be classified:

Liabilities

Bookkeeping and accounting track changes in each account as a company continues operations.

Debits and Credits

Debits and credits are essential to the double-entry system. In accounting, a debit refers to an entry on the left side of an account ledger, and credit refers to an entry on the right side of an account ledger. To be in balance, the total of debits and credits for a transaction must be equal. Debits do not always equate to increases and credits do not always equate to decreases.

A debit may increase one account while decreasing another. For example, a debit increases asset accounts but decreases liability and equity accounts, which supports the general accounting equation of Assets = Liabilities + Equity. On the income statement, debits increase the balances in expense and loss accounts, while credits decrease their balances. Debits decrease revenue account balances, while credits increase their balances.

Double-entry bookkeeping was developed in the mercantile period of Europe to help rationalize commercial transactions and make trade more efficient. It also helped merchants and bankers understand their costs and profits. Some thinkers have argued that double-entry accounting was a key calculative technology responsible for the birth of capitalism .

The accounting equation forms the foundation of double-entry accounting and is a concise representation of a concept that expands into the complex, expanded, and multi-item display of the balance sheet . The balance sheet is based on the double-entry accounting system where the total assets of a company are equal to the total liabilities and shareholder equity.

Essentially, the representation equates all uses of capital (assets) to all sources of capital (where debt capital leads to liabilities and equity capital leads to shareholders' equity). For a company to keep accurate accounts, every single business transaction will be represented in at least two of the accounts.

For instance, if a business takes a loan from a financial entity like a bank, the borrowed money will raise the company's assets and the loan liability will also rise by an equivalent amount. If a business buys raw materials by paying cash, it will lead to an increase in the inventory (asset) while reducing cash capital (another asset). Because there are two or more accounts affected by every transaction carried out by a company, the accounting system is referred to as double-entry accounting.

This practice ensures that the accounting equation always remains balanced; that is, the left side value of the equation will always match the right side value.

Example of Double Entry

A bakery purchases a fleet of refrigerated delivery trucks on credit; the total credit purchase was $250,000. The new set of trucks will be used in business operations and will not be sold for at least 10 years—their estimated useful life .

To account for the credit purchase, entries must be made in their respective accounting ledgers. Because the business has accumulated more assets, a debit to the asset account for the cost of the purchase ($250,000) will be made. To account for the credit purchase, a credit entry of $250,000 will be made to notes payable. The debit entry increases the asset balance and the credit entry increases the notes payable liability balance by the same amount.

Double entries can also occur within the same class. If the bakery's purchase was made with cash, a credit would be made to cash and a debit to asset, still resulting in a balance.

What Is the Difference Between Single-Entry Accounting and Double-Entry Accounting?

In single-entry accounting, when a business completes a transaction, it records that transaction in only one account. For example, if a business sells a good, the expenses of the good are recorded when it is purchased the good, and the revenue is recorded when the good is sold. With double-entry accounting, when the good is purchased, it records an increase in inventory and a decrease in assets. When the good is sold, it records a decrease in inventory and an increase in cash (assets). Double-entry accounting provides a holistic view of a company's transactions and a clearer financial picture.

What Is the Disadvantage of the Double-Entry Accounting System?

The primary disadvantage of the double-entry accounting system is that it is more complex. It requires two entries to be recorded when one transaction takes place. It also requires that mathematically, debits and credits always equal each other. This complexity can be time-consuming as well as more costly; however, in the long run, it is more beneficial to a company than single-entry accounting.

What Is an Example of Double Entry?

An example of double-entry accounting would be if a business took out a $10,000 loan and the loan was recorded in both the debit account and the credit account. The cash (asset) account would be debited by $10,000 and the debt (liability) account is credited by $10,000. Under the double-entry system, both the debit and credit accounts will equal each other.

The double-entry accounting method has many advantages over the single-entry accounting method. First and foremost is that it provides an organization with a complete understanding of its financial profile by noting how a transaction affects both credit and debit accounts. It also makes spotting errors easier, because if debits and credits do not match, then something is wrong. Lastly, it makes preparing financial statements easier.

Encyclopedia.com. " Accounting and Bookkeeping ."

Terms of Service
Editorial Policy
Privacy Policy
Your Privacy Choices

The global body for professional accountants

Search jobs
Find an accountant
Technical activities
Help & support

Can't find your location/region listed? Please visit our global website instead

Middle East
Cayman Islands
Trinidad & Tobago
Virgin Islands (British)
United Kingdom
Czech Republic
United Arab Emirates
Saudi Arabia
State of Palestine
Syrian Arab Republic
South Africa
Africa (other)
Hong Kong SAR of China
New Zealand
Our qualifications
Getting started
Your career
Apply to become an ACCA student
Why choose to study ACCA?
ACCA accountancy qualifications
Getting started with ACCA
ACCA Learning
Register your interest in ACCA
Learn why you should hire ACCA members
Why train your staff with ACCA?
Recruit finance staff
Train and develop finance talent
Approved Employer programme
Employer support
Resources to help your organisation stay one step ahead
Support for Approved Learning Partners
Becoming an ACCA Approved Learning Partner
Tutor support
Computer-Based Exam (CBE) centres
Content providers
Registered Learning Partner
Exemption accreditation
University partnerships
Find tuition
Virtual classroom support for learning partners
Find CPD resources
Your membership
Member networks
AB magazine
Sectors and industries
Regulation and standards
Advocacy and mentoring
Council, elections and AGM
Tuition and study options
Study support resources
Practical experience
Our ethics modules
Student Accountant
Regulation and standards for students
Your 2024 subscription
Completing your EPSM
Completing your PER
Apply for membership
Skills webinars
Finding a great supervisor
Choosing the right objectives for you
Regularly recording your PER
The next phase of your journey
Your future once qualified
Mentoring and networks
Advance e-magazine
Affiliate video support
An introduction to professional insights
Meet the team
Global economics
Professional accountants - the future
Supporting the global profession
Download the insights app

Can't find your location listed? Please visit our global website instead

Accounting for partnerships
Study resources
FA2 Maintaining Financial Records
Technical articles

The purpose of this article is to assist candidates to develop their understanding of the topic of accounting for partnerships. As such, it covers all of the learning outcomes in Section H of the detailed Study Guide for FA2.

What is a partnership?

There are a number of ways in which a partnership may be defined, but there are four key elements.

Two or more individuals A partnership includes at least two individuals (partners). In certain jurisdictions, there may be an upper limit to the number of partners but, as that is a legal point, it is not part of the FA2 syllabus.

Business arrangement A partnership exists to carry on a business.

Profit motive As it is a business, the partners seek to generate a profit.

Unincorporated business entity In FA2, a partnership will always be an unincorporated business entity. This means:

the reporting entity (business entity) principle applies to a partnership, so for accounting purposes, the partnership is a separate entity from the partners;
the partners have unlimited liability; and
if the partnership is unable to pay its liabilities, the partners may be called upon to use their personal assets to settle unpaid liabilities of the partnership.

How is a partnership controlled?

It is good practice to set out the terms agreed by the partners in a partnership agreement. While this is not mandatory, it can reduce the possibility of expensive and acrimonious disputes in the future. As a formal agreement is not mandatory, there is no definitive list of what it should contain, but FA2 exams will not go beyond the following:

Share of residual profit This is the amount of profit available to be shared between the partners in the profit or loss sharing ratio, after all other appropriations have been made. The profit or loss sharing ratio is sometimes simply called the ‘profit sharing ratio’ or ‘PSR’.

Therefore, candidates need to be aware that there is a distinction to be made between the profit for the year (income minus expenses), which is calculated in exactly the same way as for a sole trader and residual profit (the remaining profit after profit for the year has been adjusted by the appropriations in accordance with the partnership agreement).

It is worth pointing out that when a question states the profit or loss sharing ratio, that the proportions are always applied to the residual profit – not the profit for the year.

Appropriations of profit As there is no requirement for all of the appropriations considered below to be included by a specific partnership, exam questions may only include some of them. That means that you only need to deal with the appropriations referred to in the question.

Another point to remember is that the ‘appropriation account’ is an additional accounting statement that is required for a partnership. For a sole trader, the profit for the year is simply transferred to the credit side of the proprietor’s capital account (the double entry is completed by a debit entry in the statement of profit or loss, resulting in a nil balance on that statement). In the case of a partnership, the statement of profit or loss will still be debited, but the profit will be credited to the appropriation account, rather than the capital account. As each appropriation is dealt with, the double entry is completed through entries in both the appropriation account and the partner’s current account (if current accounts are not maintained by the partnership, the entries will be made in the capital accounts).

Partners’ salaries In some ways, the term ‘salaries’ is a misleading description. The salaries of employees are business expenses that are written off to the statement of profit or loss, thereby reducing profit for the year. However, as partners are the owners of the business, any amounts that are paid to them under the partnership agreement are part of their share of the profit. As the amount is guaranteed, it must be dealt with through a credit entry in the partner’s account (usually the current account) before the residual profit is shared.

The double entry is completed by a debit entry in the appropriation account.

Interest on capital Almost always, interest on capital will be paid on partners’ capital balances only – although the balances on the current accounts are actually part of the total capital balance, it is normal to exclude them from the value of capital on which interest is paid.

Paying interest on capital is a means of rewarding partners for investing funds in the partnership as opposed to alternative investments. As such, it reduces the amount of profit available for sharing in the profit or loss sharing ratio. This means that a debit entry is needed in the appropriation account. The double entry is completed by a credit entry in the current account of the partner to whom the salary is paid.

Interest on drawings Charging interest on drawings is a means of discouraging partners from withdrawing excessive amounts from the business. From this, it follows that interest on drawings is a debit entry in the partners’ current accounts and a credit entry in the appropriation account.

Depending on what the question is testing, it will either provide the amounts of interest on capital and drawings or give details of how to calculate the amounts.

Remember to deal with each of these appropriations before sharing the residual profit between the partners.

A final point in this context is that, if the total of the appropriations is greater than the profit for the year, the amount to be shared between the partners will be a loss. This will mean that the entries for the share of the residual profit will be a credit in the appropriation account (thus resulting in a nil balance) and debits in the partners’ current accounts.

What is the difference between capital and current accounts?

In one sense, there is no difference. A partner’s total capital is the sum of the balances on their capital account and their current account.

In practice, however, it is convenient to separate the amount invested by the partner (the capital account) from the amount they have earned through the trading activities of the partnership (the current account). Therefore, the capital account is usually fixed, while the current account is the current total of appropriations and the share of residual profit or loss, less drawings.

Remember that a partner’s drawings will be a debit entry in the partner’s current account.

What happens when there is a new partner?

When a new partner is admitted to the partnership, the new partner effectively buys the assets of the old partnership from the old partners.

The admission of a new partner will also mean that the profit or loss sharing ratio will change.

How does goodwill arise, and how is it treated?

Goodwill is defined as the amount by which the fair value of the net assets of the business exceeds the carrying amount of the net assets. In simple terms, ‘fair value’ can be thought of as being the same as ‘market value’. Goodwill arises due to factors such as the reputation, location, customer base, expertise or market position of the business.

In the FA2 exam, all relevant information will be provided and candidates will not be expected to calculate the value of goodwill.

The first step for dealing with goodwill is to recognise an asset. This is a debit entry for the value of the goodwill in the goodwill account. The double entry is completed with credit entries in the old partners’ capital accounts. The value of each entry is calculated by sharing the value of the goodwill between the partners in the old profit or loss sharing ratio.

If goodwill is to be retained in the partnership and therefore continue to be recognised as an asset in the partnership accounts, then no further entries are required.

If goodwill is not to be retained in the partnership, it is eliminated by a credit entry in the goodwill account. The double entry is completed with debit entries in the partners’ capital accounts. The value of each entry is calculated by sharing the value of the goodwill between the new partners in the new profit or loss sharing ratio.

If a partner is contributing (or withdrawing) capital, the relevant amount will be recorded in both the partner’s capital account and the bank account. A contribution will be a credit entry in the capital account and a debit entry in the bank account, and a withdrawal will be a debit entry in the capital account and a credit entry in the bank account.

How are loans from partners treated?

A loan is not part of the partner’s capital, and the loan is treated in the same way as a loan from a third party. The liability of the partnership will be recorded by the creation of a liability, resulting in a credit balance for the amount of the loan. The debit entry will depend on how the loan was made. If the partner deposited cash in the bank account, the debit entry will be in the bank account. If the loan was created by converting a proportion of the partner’s capital into a loan, the debit entry will be in the capital account.

The interest on the loan will be a business expense and should therefore be debited to the statement of profit or loss.

(i) – Appropriations of profit Based on the information provided, complete the following tasks:

prepare the partnership appropriation account;
calculate each partner’s share of the residual profit and total profit share; and
prepare the partners’ current accounts.

Amit and Burton are in partnership sharing profits in the ratio 3:2. The partnership’s profit for the year was $65,460. The partnership agreement provides for:

interest to be paid on the partners’ opening capital balances at a rate of 5% per annum;
interest on drawings at a rate of 8% per annum on all drawings during the year; and
Amit – $9,000; and
Burton – $5,000.

At the beginning of the year, the partners’ capital and current account balances were:

During the year, Amit’s drawings were $18,000 and Burton’s drawings were $31,000.

The closing balances are thus:

Amit – $38,443 Cr Burton – $10,465 Dr

(ii) – Change in partnership Andrew and Binta have been in partnership, sharing profits or losses in the ratio 4:3. They agreed to admit Chen to the partnership, with profits or losses being shared between Andrew, Binta and Chen in the ratio 3:2:1. On the date of the change in partnership, the partners’ capital and current account balances were:

It was agreed that, at the date of Chen’s admission, the goodwill in the partnership was valued at $42,000.

Step 1 – Recognise goodwill asset The goodwill account is created by a debit entry of $42,000.

This value is credited to the old partners in the old profit or loss sharing ratio – ie 4/7 (or $24,000) to Andrew and 3/7 (or $18,000) to Binta.

Thus, the new capital balances are:

If goodwill is to continue being recognised in the partnership accounts, no further entries are needed in relation to goodwill, as the only change is that a new asset of goodwill has been created, and the capital balances of the old partners have increased by the same value.

Step 2 – Eliminate goodwill (if required by question) If goodwill is not recognised going forward, it is eliminated by a credit entry in the goodwill account, and debit entries in the partners’ capital accounts, based in the new profit or loss sharing ratio:

As a result, the new capital balances are:

Step 3 – Contribution of capital by new partner (if required by question) If the question requires a contribution by any of the partners (or a repayment of capital) we simply need to follow the normal principles of double-entry bookkeeping.

For example, the question may require the new partner to contribute cash so that the opening capital balance is nil.

In this case, a credit of $7,000 would be needed in Chen’s capital account, so this is the amount of cash that must be contributed.

The entries will therefore be:

Debit Bank $7,000 Credit Capital – Chen $7,000

Table 1 – Summary of journal entries

* if the interest has been paid to the partner ** if the interest remains unpaid † if funds were deposited in the partnership bank account ‡ if capital was converted into a loan

Written by a member of the FA2 examining team

Useful links

Make a payment
ACCA-X online courses
ACCA Rulebook
Work for us

Connect with us

Planned system updates.

Accessibility
Legal policies
Data protection & cookies
Advertising

Join us at one of our events. Register Today

Newsletters
Client Portal
Make Payment
(855) Marcum1

Services Search

How to handle the accounting for collateral assignment split-dollar life insurance plans.

By Marc Giampaola , Director, Assurance Services & Michael Parillo , Senior Manager, Managed Services & Consulting

Split-dollar life insurance is an arrangement between two parties to share the costs and benefits of a permanent insurance policy. Often these arrangements are between an employer (the “company”) and an employee (the “executive”), involving a whole life or indexed universal life (“IUL”) policy. Companies generally use the policies as a Supplemental Executive Retirement Plan (“SERP”), which are considered non-qualified benefit plans.

The two most common types of split-dollar life insurance arrangements are endorsement and collateral assignment, which are defined based on which party controls the policy. Within these agreements, there are multiple documents executed, most commonly:

Life insurance policy – Issued by the insurance company to the policy owner on the life of the insured.
Split-dollar agreement – Agreement between employer and employee providing details of the agreement.
Promissory note – A loan issued by the company to the employee for the cost of the policy.

Endorsement split-dollar life insurance is an employer-owned policy that endorses some or all of the death benefits to the employee’s beneficiary. The employer owns and controls the policy and, therefore, makes all policy decisions (i.e., surrender). A separate agreement is entered into between the employer and employee to define the split of costs and benefits between the two parties.

Collateral assignment split-dollar life insurance policies are owned by the employee with some benefits assigned to the employer. The employee owns and controls the policy while the employer makes the premium payments. Premiums are loans to the employee. Some level of interest on the amount borrowed must be paid. The employer is ultimately reimbursed for the premiums paid and related interest from the death benefit or the cash surrender proceeds.

There are different types of collateral assignment arrangements based on the structuring of the note within the agreement. They are as follows:

Non-recourse arrangements rely solely on the underlying insurance policy for all repayment of principal and interest to the employer. The employee, or the employee’s estate, is not responsible for funding any shortfall by the policy to return the premium and related interest; however, any shortfall could be taxable to the employee as forgiveness of debt income.
Limited recourse arrangements rely primarily on the underlying insurance policy for all repayment of principal and interest owed to the employer. However, if there is a shortfall, the employee or the employee’s estate may be called upon to make up the deficiency. These arrangements generally have terms requiring the employer to seek payment from the life insurance company first; the employee is secondarily liable.
Full-recourse arrangements are similar to limited-recourse arrangements, with the difference that the employer can seek repayment of the principal and interest from the employee directly if there is a shortfall, without first pursuing any recovery from the life insurer. The employee has substantially the same net liability for any shortfall but would have the burden of satisfying the shortfall and then pursuing recovery from the policy.
Providing cash to the insurance company and establishing a premium deposit account;
Establishing a deposit account at a bank or credit union under the employee’s name; or
Purchasing a single premium immediate annuity (SPIA).

The method of funding has no impact on the accounting, as there is a single loan made to the employee.

Most commonly, companies utilize collateral assignment split-dollar life insurance set up under non-recourse or limited-recourse arrangements. As such, the focus of the accounting section will be on these types of arrangements.

RELEVANT GUIDANCE

ASC 310: Receivables (“ASC 310”)
ASC 325: Investments – other (“ASC 325”)
Loans and investments, November 2020 Edition (“PwC Loans Guide”)

ACCOUNTING FOR SPLIT-DOLLAR ARRANGEMENTS

The accounting for split-dollar arrangements is generally the same regardless of the structure of the agreement. Additionally, whether the promissory note is non-recourse or limited-recourse has no effect on the journal entries recorded over the life of the arrangement.

Recording the Loan at Issuance

In executing the transaction, the employer provides funding for the premium payments of the life insurance policy in exchange for a promissory note from the employee. The transaction meets the definition of a loan as defined by ASC 310-10, which states:

A contractual right to receive money on demand or on fixed or determinable dates that is recognized as an asset in the creditor’s statement of financial position. Examples include but are not limited to accounts receivable (with terms exceeding one year) and notes receivable.

Upon issuance of the loan, the employer provides cash through one of the funding methods described above and establishes a loan receivable from the executive. As an example, assume the defined loan amount is $3.0 million. The value of the loan is measured at issuance equal to the cash outlay by the Company. ASC 310-10-30-2 states:

As indicated in paragraph 835-30-25-4, when a note is received solely for cash and no other right or privilege is exchanged, it is presumed to have a present value at issuance measured by the cash proceeds exchanged.

In these arrangements, the company does not provide any other right or privilege. The promissory note is received in exchange for the cash needed to fund the premiums of the policy. As such, the value of the loan is equal to the cash paid.

The journal entry to record the example transaction is:

Recording the Interest Accrual

Once the loan is established, it begins earning interest based on the note rate, typically the long-term Applicable Federal Rate for the month and year the agreement becomes effective. Interest compounds annually. In the example transaction, assume an annual interest rate of 2.50%. Each month the company earns interest on the outstanding loan balance, and a journal entry is recorded to accrue interest on the loan. Interest is paid from the death benefit and, therefore, increases the receivable from the executive in each accounting period. The entry below represents the monthly accrual of interest:

(calculated as $3,000,000 loan * 2.5% interest / 12 months)

Recording the Settlement of the Loan

The loan is settled upon death or surrender of the policy. The company is entitled to the value of the original loan and accrued interest from inception. The cash owed to the company is paid from the death benefit or surrender value, with the remainder being paid to the employee (surrender) or the employee’s estate (death). Based on the example, assuming settlement and surrender of the insurance policy 24 months post entering into the policy (i.e., $150,000 interest earned), the entries to record the receipt of cash and settlement of the receivables are as follows:

Other Considerations for Subsequent Measurement

Collectability.

At each period-end, the company needs to analyze the value of the outstanding loan for changes in the valuation. Generally, these loans are considered not held for sale and, therefore, are reported at outstanding principal adjusted for any charge-offs, allowance for loan losses, deferred fees, and unamortized premiums or discounts based on ASC 310-10-35-47, which states:

Loans and trade receivables that management has the intent and ability to hold for the foreseeable future or until maturity or payoff shall be reported in the balance sheet at outstanding principal adjusted for any chargeoffs, the allowance for loan losses (or the allowance for doubtful accounts), any deferred fees or costs on originated loans, and any unamortized premiums or discounts on purchased loans.

Additionally, the company should analyze at each period-end any probable collection issues and the need for an allowance that would reduce the asset balance.

Value of the Loan

With an insurance policy securing the loan, further consideration is needed to determine the value of the loan. For endorsement arrangements, the employer owns the policy and, therefore, owns the surrender decision. The company values the loan at the lesser of the premiums paid or cash surrender value of the policy as of the period end date. This amount can generally be obtained from the statement provided by the insurance company.

For collateral assignment arrangements, the employee owns the policy, so the company does not control the surrender decision. However, the company does maintain the right to collect on the loan under the collateral assignment. Therefore, the company may need to consider the cash surrender value of the policy when determining the value of the loan. ASC 325-30-35-1 states:

An asset representing an investment in a life insurance contract shall be measured subsequently at the amount that could be realized under the insurance contract as of the date of the statement of financial position…

Depending on the type of note used in the agreement–non-recourse or limited-recourse– when determining the carrying value of the loan at each period-end.

Limited-Recourse

For limited-recourse, the loan is secured by the cash surrender value of the insurance policy, but the company also has the option to seek repayment from the employee if the cash surrender value is less than the outstanding loan amount. Since the loan is secured by both the policy and by the employee, the cash surrender value is not the only consideration when determining the value of the outstanding loan. As such, the value of the outstanding loan does not need to be adjusted if the cash surrender value is less than the outstanding loan, and there is no further consideration needed at period-end for these types of arrangements.

Non-recourse

For non-recourse notes, the loan is secured solely by the cash surrender value of the policy and, therefore, potential for a loss related to the loan exists if the cash surrender value is less than the loaned amount. The cash surrender value is the realizable amount of a life insurance contract at any given date. The accounting guidance does not allow a life insurance asset to exceed cash surrender value less an allowance for credit losses. The company is entitled to the premiums paid plus interest earned under these arrangements. The carrying value of the portion of the loan for which premiums were paid would need to consider the cash surrender value. This portion of the loan would be valued by the company as the lesser of the cash surrender value and the cumulative premiums paid by the reporting entity.

This is based on the premise that surrender is not within the control of the company and it is uncertain whether the company will be reimbursed for cumulative premiums paid upon death or surrender. Any premiums paid in excess of this amount should be recorded as an expense.

As an example, if the outstanding loan related to a non-recourse policy was $3,000,000 and the cash surrender value of the policy was $2,500,000, the company would need to reduce the carrying value of the loan to the cash surrender value and recognize a loss related to the loan. The entry below represents how the company would record the adjustment:

While the general accounting for these arrangements is similar, specific details and terms within all documents included in the agreement need to be evaluated when determining the appropriate accounting, and companies should consult their accountant with any questions. Additionally, there are potential individual income tax implications for the executive related to these arrangements that should be considered.

Related Insights & News

Enhancing Transparency: New Disclosure Requirements for Agents and Brokers in Group Health Insurance

The business health insurance industry has undergone a significant regulatory update that aims to improve transparency.

How a Qualified CPA Addresses Key Audit Needs of Captive Insurance Companies

Southeast regional managing partner michael balter was quoted in south florida business journal on surging commercial property insurance rates, advisory director john heller spoke with the sun sentinel for a story about banks seeking to reassure depositors their accounts remain safe., countdown to adoption of asc 842: leases for private companies, upcoming events.

Innovate for Impact

Washington, DC

Emerging Managers Series: Considerations for Offshore Funds

New York, NY

The Role of Technology in Enhancing Agile Demand Planning for Manufacturer

Essentials of an Operating Reserve Policy for Nonprofits

Marcum Women’s Forum: Courage

Cocktails & Conversations

Greenwich, CT

Cyber Threats and Prevention: A Growing Concern for Businesses

Burlington, MA

Automation Alphabet Soup: Decoding the ABCs of Accounting Tech

Nashville, TN

Cleveland, OH

The Marcum & GNHCC 2024 Regional Real Estate Forum

Branford, CT

Combatting Cyber Risk in the Food & Beverage Industry

Exploring the Potential Impact of Generative AI on Healthcare

Integrating FP&A Software into Your Financial Operations

The Business of Cannabis: A Legal and Tax Update

Stratford, CT

Top 5 Nonprofit Investment Insights

New Haven, CT

Navigating the Presidential Election: Insights for Nonprofit Investment Reserves

Streamlining the Financial Close Process: How Close Management Software Transforms Efficiency

Mission Possible: Nonprofits in the Age of Digital Finance

Marcum Women’s Initiative: Coffee and Conversations

Robotic Process Automation and AI: The Next Frontier in Finance Transformation

Marcum New England Construction Summit

Marcum Manufacturing Forum

Marcum Mid-South Construction Summit

Marcum Ohio Construction Summit

Warrensville Heights, OH

Related Industries

Financial Institutions , Financial Services , Insurance

Have a Question? Ask Marcum

Skip to primary navigation
Skip to main content
Skip to primary sidebar

Free ACCA & CIMA online courses from OpenTuition

Free Notes, Lectures, Tests and Forums for ACCA and CIMA exams

20% off ACCA & CIMA Books

OpenTuition recommends the new interactive BPP books for June 2024 exams, Get your discount code >>

Double Entry Bookkeeping – Starting a business and its initial transactions

CAT FA1 Course Notes Contents Page

Transaction 1.

The owner starts up the business in 1/1/2013 by putting $10,000 of cash in as capital.

From the business’s point of view, its cash has increased by $10,000 and its capital has increased by $10,000. Cash is an asset (something owned) and the capital is the amount owed by the business back to its owner.

The double entry would be:

starting a business double entry bookkeeping t accounts transaction 1

Notice the cross-referencing between the accounts. The entry in the Cash account is described as ‘Capital’, which is where the cash came from; the entry in the Capital account is described as ‘Cash’, the nature of the capital injected.

Accounting equation:

Things owned, cash $10,000 = Things owed, capital 10,000

Transaction 2

The business buys some equipment for $2,000 cash on 3/1/2013.

Cash has decreased $2,000 and the cost of equipment has increased by $2,000

starting a business double entry bookkeeping t accounts transaction 2

Note the balance on this account is Dr 8,000, the net of the Dr and Cr sides

Things owned, cash $8,000 + equipment $2,000 = Things owed, capital $10,000

Transaction 3

On 10/1/2013, the business purchases goods for resale for $5,000 on credit.

The asset of inventory increases and the liability to suppliers increases

Things owned, cash $8,000 + equipment $2,000 + inventory $5,000

= Things owed, capital $10,000 + suppliers $5,000

Transaction 4

On 15/1/2013, sells half the goods for $4,000 credit.

This will create a profit of 4,000 – 5,000/2 = $1,500. The profit is owed to the owners and is a liability of the business to its owners.

We can look at the sale in two parts: earning $4,000 for a cost of 5,000/2 = 2,500.

starting a business double entry bookkeeping t accounts transaction 4

Things owned, cash $8,000 +equipment $2,000+inventory $2,500 + due from customers $4,000 = $16,500

= Things owed, suppliers $5,000 capital $10,000 + profit [4,000 – 2,500] = $16,500

Transaction 5

On 31/1/2013, the suppliers are paid what they are owed and $100 is paid for rent.

The rent is an expense and decreases the profit. Paying suppliers what is owed to them has no effect on profits.

starting a business double entry bookkeeping t accounts transaction 5

Things owned, cash $2,900+equipment $2,000+inventory $2,500 + due from customers $4,000 = $11,400

= Things owed, capital $10,000 + profit [4,000- 2,500 – 100 (rent)] = $11,400

Reader Interactions

Double Entry Bookkeeping

learn bookkeeping online for free

Home > Other Long Term Debt > Finance Lease Accounting Journal Entries

Finance Lease Accounting Journal Entries

The finance lease accounting journal entries below act as a quick reference, and set out the most commonly encountered situations when dealing with the double entry posting of finance or capital leases.

Typical Finance Lease Accounting Journal Entries

A note on operating leases.

The other form of lease is an operating lease, in this case the rental payments are simply recorded on a straight line basis as operating expenses.

About the Author

Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.