To show liabilities for the total borrowed including interest, not just the principle/asset amount, one needs to raise the interest which has not been paid yet, but will be paid over the life of the loan.
The full amount of interest should be stated on the loan contract – see what it is.
Check what date we entered the asset/loan – Ctrl+Y then Accounts, then drop down the list and search for the account with the loan (#2 accounts), note the date
Open a new General Journal (In MYOB – Accounts Command centre > Record Journal Entry, In Quickbooks – Company (in Menu) > Make General Journal Entries, or older version Activities > Make Journal Entry)
Date is the same as the asset/loan transaction
Memo/Subject – “ (Asset name/or rego) Interest Total due on loan”
In the lower part of the transaction –
First account is the Loan account you just checked, for that loan (for the asset in question), enter $ Total Interest as CREDIT
Next line has a new account – drop down the account list, and scroll to the loans again (#2 accounts) decide on a number not used, after them and click NEW – create a new #2 account with name “Unexpired Interest Liabilities”, Tax code N-T, save, then back in the transaction it should be in the Journal at second line now, or search again and select this new account, enter as DEBIT, the same amount (should auto-fill) as the total interest. This will balance the transaction
Save the Journal.
The loan should INCREASE by the interest amount, liabilities for the total borrowed including interest, not just the principle/asset amount, but that will be offset by the amount in “Unexpired Interest”, as it hasn’t occurred until the interest is paid!
WHEN a payment is made it should all go to the Asset account for that asset – the interest will be checked and calculated at year end by your accountant and adjusted to claim the interest at year end in the Profit & Loss.
Repeat for each loan related to each asset
For more details on entering loans for assets click HERE
Bookkeepers & Business Owners 