[Question] PLEASE HELP - LOAN ACCOUNT JOURNAL

[dvvdee]

Hi There,

I have (maybe) a stupid question but I just can't seem to figure it out.

Say there is an HP with a credit balance in your books. Every month when your debit order goes off you credit bank and debit HP.

Now the owner says listen Mr. Ben that is not related to the company in any way will be driving that vehicle and refund us the payment monthly.

So on refund date you debit bank and credit his (new) loan account. So bank balance is correct, the HP is correct but his loan account is in credit. My problem is the following: To now bring in the loan against mr. Ben, his loan account, but what shall I credit???

[Andromeda]

Presumably you debited Motor Vehicles at cost, credited HP Creditor with the full purchase price. Then you debited HP creditor and credited bank with the monthly repayments? That would have been correct given your understanding at the time.

To correct it you would need to reverse the Motor vehicles / HP creditor entry, so at this stage Motor vehicles = nil and HP creditor = debit total equal to all monthly payments.

Now credit all monthly repayments to the HP creditor account and debit Ben loan account.

Future payments you will debit Ben loan account and credit Bank.

[dvvdee]

The problem is thay only want to start having him pay from the new month not the entire vehicle back.

Presumably you debited Motor Vehicles at cost, credited HP Creditor with the full purchase price. Then you debited HP creditor and credited bank with the monthly repayments? That would have been correct given your understanding at the time.

To correct it you would need to reverse the Motor vehicles / HP creditor entry, so at this stage Motor vehicles = nil and HP creditor = debit total equal to all monthly payments.

Now credit all monthly repayments to the HP creditor account and debit Ben loan account.

Future payments you will debit Ben loan account and credit Bank.

[Kevin Smith]

Not sure how correct/legal it is from an accounting perspective - maybe someone else can comment.

Leave all the entries as they are - you are still liable to pay off the vehicle (ie the HP creditor) and you still own it till he has paid it off. Leave the vehicle in FA MV @ cost - that way you can depreciate it over his repayment terms. Debit bank and credit his loan with his monthly payments up until the vehicle is paid off. At that point, sell the vehicle to him and offset it against his loan account. The difference between his loan account value at time of sale and the depreciated value of the vehicle would be put to profit on sale of Fixed Assets (MV).

[Andromeda]

If you debit his loan account, what will you credit? That's your original question .... there is no correct answer that I can think of because the transaction is fundamentally flawed. You need to sort out ownership first.