how to enter interest payments on a car loan with balloon payment
Comments
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There are a few ways to do this, and it often depends on the way your accountant likes to see the liability portrayed in the Balance Sheet of the business. What I do with my clients, is record the (car) purchase as an asset, and the liability as the offset. Example $40,000 CAG $4,000 with equivalent liability $44,000 (ignoring for the moment other costs of borrowing etc)
The finance company may issue a schedule detailing principal and interest in each repayment - simply split the repayment to the liability and to the Interest Expense account (eg a $1,500 repayment might be $785.00 principal to the liability account, $713 to Interest Expense, $2 to Bank Fees (if applicable) The Balloon is simply the last payment (if not being re-financed)
Your accountant should be able to calculate a repayment schedule splitting principal and interest if the finance company does not provide, or there are some/many calculators online
Other accountants like to gross up the liability and have an offsetting (negative) liability showing on the Balance Sheet.
Regards
John Gibson
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The best method is to set up a liability account for the total amount of the loan including interest. This account will be the account to which you debit all payments to. The total interest on the loan is charged to an account called Deferred Interest which can be in the same account subgroup as the loan account. The interest can be charged out to interest expense each month or at the end of the year. If you are not supplied with a principal & interest schedule you can calculate the interest for each month using the rule of 78 (sum of the months) method When the loan is finally paid and all journal entries for the interest have been made, the balance on both accounts will be zero (you may have a minor rounding amount left on the iDeferred Interest account)
Michael M0 -
Thanks. Problem solved.0
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