Getting ready for Year End


J

John Pippy

Trying to get my head around this and looking for clarification.

Situation setting up the year end.

Beginning of fiscal year I got a loan from the bank to purchase a utility
trailer for $15,000. I then set up a fixed asset account for $15,000
including sub account for accumulated depreciation and an account for
depreciation expense. I then set up a Long term liability account for the
amount of the bank loan $15,000.

Ok when I go to enter a payment on the loan I go to write cheques and credit
the long term liability account for the trailer I then go and write another
cheque to record the interest expense.

I also credited the accumulated depreciation for past year $2,250 and
debited depreciation expense $2,250

So far I want to know if I have done this correct.

Finally, would someone please explain the effects could someone explain the
effects of this transaction on the balance sheet and the profit and loss
statement. For example is there any affect on the P & L sheet due to the
loan payments I made the past many months?

Thanks,

John
 
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A

Allan Martin

John Pippy said:
Trying to get my head around this and looking for clarification.

Situation setting up the year end.

Beginning of fiscal year I got a loan from the bank to purchase a utility
trailer for $15,000. I then set up a fixed asset account for $15,000
including sub account for accumulated depreciation and an account for
depreciation expense. I then set up a Long term liability account for the
amount of the bank loan $15,000.
Proper accounting would require two accounts for the loan, the short term
portion and the long term.
Ok when I go to enter a payment on the loan I go to write cheques and
credit the long term liability account for the trailer I then go and write
another cheque to record the interest expense.
Does the bank require two separate checks, one for principal and the other
interest?
I also credited the accumulated depreciation for past year $2,250 and
debited depreciation expense $2,250
I would image a utility trailer would have a class life of 5 years,
therefore 200%DB would be in order rather than the150%DB you took. There is
always the matter of taking a section 179 deduction which should also be
considered.

So far I want to know if I have done this correct.

Finally, would someone please explain the effects could someone explain
the effects of this transaction on the balance sheet and the profit and
loss statement. For example is there any affect on the P & L sheet due to
the loan payments I made the past many months?
No paying off the princpal on a loan has no effect on the profit and loss.
 
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S

S.M. Serba

Has your lender sent you a loan statement indicating:

1) the opening balance of the loan
2) principal paid to end of year
3) interest paid to end of year?

You will need to account for that in your year end as well.

Is your depreciation rate correct? Is it the correct depreciation
method to be used in your tax jurisdiction?

The loan payments affect the Balance Sheet, not the P&L. You are
decreasing a liability by decreasing an asset. Both are BS items.

Your depreciation adjustments DO affect the P&L, you are reducing the
book value of the asset by moving a portion from the asset value to
expense. IE. reducing a BS amount (technically increasing a
contra-asset account value) and increasing the depreciation expense.

Also, when you properly book the interest expense, you are affecting
the P&L as well, since you are increasing the P&L account.

Do you have an amortization schedule from the lender? Is the interest
rate fixed? If yes, and you have the year end loan statement, you can
calculate the interest rate and generate your own schedule and use it
to book your loan payments monthly with a correct principal and
interest payment.

Stephanie
 

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