Various Types of Transactions – Part 5, Disbursement or Release of Principal Sum of Loans or Borrowings from Third Parties

Business entities may apply for loans or borrow money from third parties (usually financial institutions; sometimes in the form of short term loans or advances from owners, directors & etc.). THIS IS NOT A SOURCE OF REVENUE OR OTHER INCOME. This is because the principal sum borrowed is a liability (resource – money that you get from others temporarily and you need to pay the price for this – interest). I include it together with the series of discussion of revenue and other income to follow the sequence of discussing various types of transactions appearing in the cash book. Upon fulfilling the terms and conditions set and agreement reached between the borrowers and the lenders, the principal sum of the loan will be realeased to the borrowers

The double entry involved in the recording of the realease of the loan is as follows:-

 

Balance Sheet

Income Statement

 

DR

CR

DR

CR

Cash at bank

24,000

     
Loan from XXX Bank

 

24,000

 

 

A decision need to be made as to whether the loan should be classified as current liability or non-current liability. This involves “splitting” the loan into the current portion and non-current portion in accordance with the repayment terms. Some business entities do not split the loan into current and non-current since it received the realease of the loan, nor during the financial year. The splitting of the loan into current and non-current portion is done ONLY as at the end of the financial year for proper financial statements presentation purposes. This is achieved by way of a reclassification journal entry once the current portion and non-current portion of the loan is calculated (this must be reflective of the position of the loan to the business entities as at the end of the financial year).

Assume the $24,000 loan received from XXX Bank is repayable over 5 years with monthly principal repayment of $500 (the interest on loan is purposely omitted), and as at the end of the financial year, the balance of the loan is $19,500 (This means 9 installments of $500 have been repaid). The portion of the loan to be classified as current liability is $6,000 (i.e. the amount expected to be repaid over the next 12 months from the end of the financial year, $500 x 12 months). The non-current portion of the loan is therefore $13,500 ($19,500 – $6,000). Assume the Loan from XXX Bank was originally classified as a current liabilities account, the reclassification journal entry is:-

 

Balance Sheet

Income Statement

 

DR

CR

DR

CR

Loan from XXX Bank (Current liabilities)

13,500

     
Loan from XXX Bank (Non-Current liabilities)

 

 

13,500

 

 

Further Example

The financial period of ABC Co. Ltd. is from 1 January to 31 December. On 1 January 2006, ABC Co. Ltd receive $100,000 loan from Northern Bank upon approval of its application submitted earlier. Interest is charged at 7% per annum calculated monthly. Based on these terms, the repayment schedule is tabulated as follows:-

Example Of Loan Repayment Schedule 

Assume ABC Co. Ltd. pays the installments on time

The double entries to record the transactions during the year ended 31 December 2006 are as follows:-

 

Balance Sheet

Income Statement

 

DR

CR

DR

CR

1 January 2006

 

     
 

 

     
Cash at bank

100,000

     
Loan from Northern  Bank

 

 

100,000

 

 

 

 

     
31 January 2006

 

     
 

 

     
Loan from Northern Bank

1,396.67

     
Interest expense

 

 

583.33

 
Cash at bank

 

1,980

   
(Please refer to instalment No. 1 of the repayment schedule)

 

     
 

 

     
28 February 2006

 

     
 

 

     
Loan from Northern Bank

1,404.81

     
Interest expense

 

 

575.19

 
Cash at bank

 

1,980

   
(Please refer to instalment No. 2 of the repayment schedule)

 

     
 

 

     
31 March 2006

 

     
 

 

     
Loan from Northern Bank

1,413.01

     
Interest expense

 

 

566.99

 
Cash at bank

 

1,980

   
(Please refer to instalment No. 3 of the repayment schedule)

 

     
 

 

     
30 April 2006

 

     
 

 

     
Loan from Northern Bank

1,421.25

     
Interest expense

 

 

558.75

 
Cash at bank

 

1,980

   
(Please refer to instalment No. 4 of the repayment schedule)

 

     
 

 

     
31 May 2006

 

     
 

 

     
Loan from Northern Bank

1,429.54

     
Interest expense

 

 

550.46

 
Cash at bank

 

1,980

   
(Please refer to instalment No. 5 of the repayment schedule)

 

     
 

 

     
30 June 2006

 

     
 

 

     
Loan from Northern Bank

1,437.88

     
Interest expense

 

 

542.12

 
Cash at bank

 

1,980

   
(Please refer to instalment No. 6 of the repayment schedule)

 

     
 

 

     
31 July 2006

 

     
 

 

     
Loan from Northern Bank

1,446.27

     
Interest expense

 

 

533.73

 
Cash at bank

 

1,980

   
(Please refer to instalment No. 7 of the repayment schedule)

 

     
 

 

     
31 August 2006

 

     
 

 

     
Loan from Northern Bank

1,454.71

     
Interest expense

 

 

525.29

 
Cash at bank

 

1,980

   
(Please refer to instalment No. 8 of the repayment schedule)

 

     
 

 

     
30 September 2006

 

     
 

 

     
Loan from Northern Bank

1,463.19

     
Interest expense

 

 

516.81

 
Cash at bank

 

1,980

   
(Please refer to instalment No. 9 of the repayment schedule)

 

     
 

 

     
31 October 2006

 

     
 

 

     
Loan from Northern Bank

1,471.73

     
Interest expense

 

 

508.27

 
Cash at bank

 

1,980

   
(Please refer to instalment No. 10 of the repayment schedule)

 

     
 

 

     
30 November 2006

 

     
 

 

     
Loan from Northern Bank

1,480.31

     
Interest expense

 

 

499.69

 
Cash at bank

 

1,980

   
(Please refer to instalment No. 11 of the repayment schedule)

 

     
 

 

     
31 December 2006

 

     
 

 

     
Loan from Northern Bank

1,488.95

     
Interest expense

 

 

491.05

 
Cash at bank

 

1,980

   
(Please refer to instalment No. 12 of the repayment schedule)

 

     

The relevant “T” accounts shown below provide a clearer picture of the figures involved in respect of the release of loan and the repayments recorded during the year ended 31 December 2006:-

ABC Co. Ltd

General Ledger

Loan From Northern Bank (Balance Sheet)

DEBIT

CREDIT

Date Descriptions Folio

 $

Date Descriptions Folio

 $

2006

     

2006

     

31-Jan

Cash at bank  

         1,396.67

01-Jan

Cash at bank  

   100,000.00

28-Feb

Cash at bank  

         1,404.81

     

 

31-Mar

Cash at bank  

         1,413.01

     

 

30-Apr

Cash at bank  

         1,421.25

       

31-May

Cash at bank  

         1,429.54

       

30-Jun

Cash at bank  

         1,437.88

       

31-Jul

Cash at bank  

         1,446.27

       

31-Aug

Cash at bank  

         1,454.71

       

30-Sep

Cash at bank  

         1,463.19

       

31-Oct

Cash at bank  

         1,471.73

       

30-Nov

Cash at bank  

         1,480.31

       

31-Dec

Cash at bank  

         1,488.95

       

31-Dec

Balance C/F  

       82,691.68

       
     

     100,000.00

     

   100,000.00

     

 

     

 

               

Cash at bank (Balance Sheet)

DEBIT

CREDIT

Date Descriptions Folio

 $

Date Descriptions Folio

 $

2006

   

 

2006

     

01-Jan

Balance B/F  

         5,467.98

31-Jan

Loan from Northern Bank  

       1,396.67

01-Jan

Cash at bank  

     100,000.00

31-Jan

Interest expense  

           583.33

     

 

28-Feb

Loan from Northern Bank  

       1,404.81

     

 

28-Feb

Interest expense  

           575.19

     

 

31-Mar

Loan from Northern Bank  

       1,413.01

     

 

31-Mar

Interest expense  

           566.99

     

 

30-Apr

Loan from Northern Bank  

       1,421.25

     

 

30-Apr

Interest expense  

           558.75

     

 

31-May

Loan from Northern Bank  

       1,429.54

     

 

31-May

Interest expense  

           550.46

     

 

30-Jun

Loan from Northern Bank  

       1,437.88

     

 

30-Jun

Interest expense  

           542.12

     

 

31-Jul

Loan from Northern Bank  

       1,446.27

     

 

31-Jul

Interest expense  

           533.73

     

 

31-Aug

Loan from Northern Bank  

       1,454.71

     

 

31-Aug

Interest expense  

           525.29

     

 

30-Sep

Loan from Northern Bank  

       1,463.19

     

 

30-Sep

Interest expense  

           516.81

     

 

31-Oct

Loan from Northern Bank  

       1,471.73

     

 

31-Oct

Interest expense  

           508.27

     

 

30-Nov

Loan from Northern Bank  

       1,480.31

     

 

30-Nov

Interest expense  

           499.69

     

 

31-Dec

Loan from Northern Bank  

       1,488.95

     

 

31-Dec

Interest expense  

           491.05

     

 

31-Dec

Balance C/F  

     81,707.98

     

     105,467.98

     

   105,467.98

     

 

     

 

               

Interest expense (income statement)

DEBIT

CREDIT

Date Descriptions Folio

 $

Date Descriptions Folio

 $

2006

     

2006

     

31-Jan

Interest expense  

             583.33

31-Dec

To income statement  

       6,451.68

28-Feb

Interest expense  

             575.19

     

 

31-Mar

Interest expense  

             566.99

     

 

30-Apr

Interest expense  

             558.75

     

 

31-May

Interest expense  

             550.46

     

 

30-Jun

Interest expense  

             542.12

     

 

31-Jul

Interest expense  

             533.73

     

 

31-Aug

Interest expense  

             525.29

     

 

30-Sep

Interest expense  

             516.81

     

 

31-Oct

Interest expense  

             508.27

     

 

30-Nov

Interest expense  

             499.69

     

 

31-Dec

Interest expense  

             491.05

     

 

     

         6,451.68

     

       6,451.68

     

 

     

 

Before the income statement and balance sheet of ABC Co. Ltd. are finalized, a reclassification journal entry is required to present correctly the current portion and non-current portion of the Loan from Northern Bank. From the “T” account shown above, the outstanding amount of Loan from Northern Bank as at 31 December 2006 was $82,691.68 (31-Dec Balance C/F). From the loan repayment schedule, the principal sum expected to be repaid in Year 2 is $18,559.53. This is the portion of the loan expected to be repaid within 12 months from the year end i.e. 31 December 2006 and therefore should be presented as a current liabilities item. The non-current portion of the loan is calculated as follows:-

Principal sum outstanding as at 31 December 2006

            82,691.68

Principal sum expected to be repaid in the next 12 months

            (18,559.53)

Principal sum expected to be repaid after the next 12 months

            64,132.15

Assume the Loan from Northern Bank was originally classified as a current liabilities account, the following reclassification journal entry is required to reflect correctly the current portion and the non-current portion of the loan on the balance sheet:-

 

Balance Sheet

Income Statement

 

DR

CR

DR

CR

Loan from Northern Bank (Current liabilities)

 

64,132.15

     
Loan from Northern Bank (Non-Current liabilities)

 

 

 

64,132.15

 

 

The income statement and balance sheet of ABC Co. Ltd. after the above transactions being recorded in the respective accounts and also the impact of the $64,132.15 reclassification journal entry are as follows: –

Income Statement and Balance Sheet of ABC Co. Ltd.
         
Income Statement for the year ended 31 December 2006
  BEFORE

 Adjustment

 AFTER
   

 DR

 CR

 
 

 $

   

 $

Sales

          109,270.00

   

             109,270.00

Cost of Sales

–          40,875.00

   

–              40,875.00

Gross profit

            68,395.00

   

               68,395.00

Other income: –        
Rental income

            12,000.00

   

               12,000.00

Operating expenses: –        
Accountancy fee

–                800.00

   

–                    800.00

Depreciation of property, plant and equipment

–             4,400.00

   

–                4,400.00

Donation

–                500.00

   

–                    500.00

Electricity & water

–             3,340.00

   

–                3,340.00

Interest expense

–   6,451.68

   

–                6,451.68

Printing & stationery

–             1,697.00

   

–                1,697.00

Rental of premises

–          12,000.00

   

–              12,000.00

Salaries

–          27,865.00

   

–              27,865.00

Upkeep of office

–             3,547.00

   

–                3,547.00

Telephone charges

–             1,285.00

   

–                1,285.00

Travelling, petrol & toll charges

–             2,648.00

   

–                2,648.00

 

–          64,533.68

   

–              64,533.68

Net profit for the year

            15,861.32

   

               15,861.32

Retained profits B/F

            27,654.00

   

               27,654.00

Retained profits C/F

            43,515.32

   

               43,515.32

         
Balance Sheet as at 31 December 2006        
 

 $

   

 $

Non-current assets        
Property, plant and equipment

            19,600.00

   

               19,600.00

         
Current assets        
Inventories

              5,000.00

   

                  5,000.00

Trade receivables

            32,807.00

   

               32,807.00

Other receivables, deposits & prepayments:

 

   

 

Rental receivable

              3,000.00

   

                  3,000.00

Rental deposit

              3,000.00

   

                  3,000.00

Utility deposit

                  500.00

   

                     500.00

Cash and bank balances

          105,467.98

   

             105,467.98

 

          149,774.98

   

             149,774.98

Current liabilities        
Trade payables

–             3,588.00

   

–                3,588.00

Other payables and accruals

–          24,579.98

   

–              24,579.98

Loan from Northern Bank

– 82,691.68

   64,132.15

 

–   18,559.53

 

–        110,859.66

   

–              43,139.51

Net current assets

            38,915.32

   

             106,635.47

 

            58,515.32

   

             126,235.47

Financed by: –        
Share capital

            15,000.00

   

               15,000.00

Retained profits

            43,515.32

   

               43,515.32

 

            58,515.32

   

               58,515.32

Non-current Liabilities        
Loan from Northern Bank

 

  64,132.15

     64,132.15

 

            58,515.32

   

             122,647.47

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