CC member loan

[CLIVE-TRIANGLE]

Your questions
1) Process those invoices as bills in Quickbooks in the normal manner, at the invoice dates. Then do journal entries:
Dt. Accounts Payable with the name of the supplier in the name field
Cr. Loan from member
You can only do 1 Accounts payable line per journal.
Once you are done, the suppliers' accounts will be nil, while you will reflect a balance due to the member on his loan account.
There is nothing sinister about reflecting a loan due to member when there was no actual loan advanced. Don't think terminology; think debits and credits.

2) & 3)The correct treatment of a finance lease is to recognise the asset and lease liability at inception, excluding finance charges. The part of IAS that applies to you requires as follows:

Initial recognition
- Recognise a finance lease as assets and liabilities in the statement of financial position at the lower of the
fair value of the leased asset and present value of the minimum lease payments.
- Discount rate to be used in calculating the present value of the minimum lease payments is implicit in the
lease. If not practicable to determine, the lessee’s incremental borrowing rate shall be used.
- Any initial direct costs of the lessee are added to the amount recognised as an asset.

Subsequent recognition
- Minimum lease payments made are apportioned between finance charges and reduction of the
outstanding liability.
- Finance charge shall be allocated to each period during the lease term so as to produce a constant periodic
rate of interest on the remaining balance of the liability.
- Contingent rents shall be charged as expenses when they occur.
- Finance lease gives rise to depreciation expense and finance expense. Depreciation policy for depreciable
leased assets shall be consistent with that for depreciable assets that are owned
- If there is no reasonable certainty that the lessee will obtain ownership by the end of the lease term, the
asset shall be fully depreciated over the shorter of the lease term and its useful life

4)It can be classified either as salaries or dividends. As from 1 April 2012, a new withholding tax on dividends comes into being. In any event, it is not a simple matter to determine which method will be the most tax effective without crunching the numbers and knowing a lot more about the finances of the cc as well as the members.
My instinct would be treat it salaries (director's /member's remuneration) and to deduct PAYE from it.
The invoice method you propose should not be regarded as an option.

[aktorsyl]

Clive,
Thanks. To follow up:

1) If I understand you correctly, it's the same process as paying a loaded bill, but instead of crediting (for instance) the Repairs&Maintenance account, we credit the member's Loan account? In addition to debiting the Accounts Payable, of course.
NOTE: I have noticed that, when you capture the invoice as a bill in Quickbooks, you have to specify the expense account, and it debits that account immediately when the bill is loaded (before it gets paid). I've looked at the journal, and this seems to be the road it follows:

When I load the invoice as a bill, the following happens:
a) Cr Accounts Receivable
b) Dt the relevant expense account (for instance Repairs&Maintenance)

When I pay the bill, the following happens:
a) Dt Accounts Receivable
b) Cr Bank Account

So with that in mind, I managed to confuse myself. I therefore assume it's not possible to credit the loan account via the bill payment interface, it has to be done manually in the journal? Do I still go through the bill payment interface and THEN modify the journal, or how would I do it? Sorry, I know I'm asking very Quickbooks-specific questions, but my accounting knowledge is definitely not on par.

2&3) Ok that makes sense, but I'm unsure how to implement this in Quickbooks?

4) Treating remuneration as salaries and deducting PAYE means the CC will have to register with SARS as an employer and take on a lot of extra admin - I take it there's no alternative?

[Dave A]

I therefore assume it's not possible to credit the loan account via the bill payment interface, it has to be done manually in the journal?

This is why I suggest setting up a member transaction account as a bank account. You use this account for these sorts of transactions just as you would with a normal bank account. Any payments made to the member as recompense would also go to this transaction account.

And then periodically post the balance to the member's loan account.

[aktorsyl]

1) Managed to do this by creating a new bank account, called Transmission. Paid the bills from the Transmission account, then debited the transmission account by crediting the loan account. All worked out in the end.

2&3&4) Still stuck with these.

Clive,
Thanks. To follow up:

1) If I understand you correctly, it's the same process as paying a loaded bill, but instead of crediting (for instance) the Repairs&Maintenance account, we credit the member's Loan account? In addition to debiting the Accounts Payable, of course.
NOTE: I have noticed that, when you capture the invoice as a bill in Quickbooks, you have to specify the expense account, and it debits that account immediately when the bill is loaded (before it gets paid). I've looked at the journal, and this seems to be the road it follows:

When I load the invoice as a bill, the following happens:
a) Cr Accounts Receivable
b) Dt the relevant expense account (for instance Repairs&Maintenance)

When I pay the bill, the following happens:
a) Dt Accounts Receivable
b) Cr Bank Account

So with that in mind, I managed to confuse myself. I therefore assume it's not possible to credit the loan account via the bill payment interface, it has to be done manually in the journal? Do I still go through the bill payment interface and THEN modify the journal, or how would I do it? Sorry, I know I'm asking very Quickbooks-specific questions, but my accounting knowledge is definitely not on par.

2&3) Ok that makes sense, but I'm unsure how to implement this in Quickbooks?

4) Treating remuneration as salaries and deducting PAYE means the CC will have to register with SARS as an employer and take on a lot of extra admin - I take it there's no alternative?

[Dave A]

There is a substantial difference in the accounting entries between a financial lease and a hire/purchase agreement. Hire to purchase is off-balance-sheet financing.

In your rent-to-purchase situation, you will expense the payments made against an expense account as you make the payments.
At the end of the rental agreement (and only at the end of the agreement), you will capitalise the asset at fair value and this will be funded by "rent recovered" - effectively debit the asset account and credit a rent recovered (other income) account.

[CLIVE-TRIANGLE]

1. Supplier invoices paid by member.
It is always helpful to work out what really happened and then select the various mechanisms offered by the accounting package, that best gives effect to the transactions. You MUST know the desired outcome before you do the entries, then it becomes easy.

Take your case: Firstly, the cc incurred expenses and vat input credits. Therefore you need to DEBIT expenses, DEBIT vat liability and CREDIT the vendor with the sum of the two.
The mechanism for this in Quickbooks is a BILL (Amricanese for a supplier invoice.)
The result of a Bill is a DEBIT to expenses (or wherever allocated) and an amount owing to a Supplier (Creditor), which is the credit.

In this case a member has paid the bills. So the amount is no longer owed to the supplier, but it is owed to the member. That means the supplier must now be DEBITED and the member CREDITED.

One of the methods is to use a pseudo bank account as Dave suggested, with the balance of the account transferred to the members loan account at the end of a period. I frequently do this, but I actually don’t like this method because it records cheque payments in the books of account that never happened. It’s fine and well when I am the Accounting Officer or Auditor, but it is not always easy for a bookkeeper to explain to someone charged with oversight why they did it this way.

Back to reality: The member needs a CREDIT and the supplier needs a DEBIT. I suggest a journal entry to achieve this result.

2. Your rent to purchase dilemma.
If the substance of the agreement (not the form), indicates that it is a finance lease, then you need to do asset / liability recognition at commencement. Compare your agreement to IAS 17

Here is a link to the full IAS:

http://www.iasplus.com/standard/ias17.htm

To give effect to the entry in your case depends on the terms of the agreement because at the outset one needs to know how this thing must be classified.

3. Members remuneration.
At R30,000 per annum there is no PAYE. But I assume the members have other taxable income and if R30,000 is added to it, it will increase their personal tax liability.

If no paye is deducted you would still be required to issue an IT3 which does require registration.
There are only 3 options really, repayment of loan (i) account, (ii) remuneration or (iii) dividends. Only loan repayment has no admin overhead.

[CLIVE-TRIANGLE]

I therefore assume it's not possible to credit the loan account via the bill payment interface, it has to be done manually in the journal? Do I still go through the bill payment interface and THEN modify the journal, or how would I do it? Sorry, I know I'm asking very Quickbooks-specific questions, but my accounting knowledge is definitely not on par.

Actually there is, provided the member paid the bill on or about the same date as bill.
You begin with the bill as normal, but at the top where you enter the total of the bill, make it Zero.
In the detail area, select Accounts (not items) and allocate the amount of the expense to the expense account and VAT.
The bill at this point is out of balance.
On the next line allocate the total amount of the bill (including VAT) to the Member's loan account, as a negative.
The bill at this point balances.
The result will be:
Expense - debit
Vat liability - debit
Accounts payable - nothing
Members lac - credit

[aktorsyl]

I think there may be some confusion regarding the nature of the rent-to-own / lease agreement we have with our supplier.

The equipment we're buying from them is already in our depot, and we use it on a daily basis. But legally, they still own it. They are selling it to us at a value of X rand. We pay them Y amount per month (the exact amount varies from month to month depending on how much we can afford to pay them on that given month) until the full amount they have received from us from these monthly payments equals X. At that point, the equipment becomes ours. There is no interest rate at play here, and no deposit was payable.

[BusNavig8]

In my humble opinion they should be stated as members loans payable and loans receivable using sub accounts (i.e a debit loan account and a credit loan account). They are definately long term liabilities, and they should not touch the equity account as righly said this is for accumulated profits and losses. The way I indicate what the actual loans are in respect of are by using the "Memo" facility in QBooks as it is not so much a tax issue for me but a measurement of how the CC is performing and who funds are being utilised and for what they are being utilised and how often. So I use it more for a tool than anything else.

[BusNavig8]

Why do you have to raise a "BILL". I only raise the "Bill" for accruals or when it falls outside the vat period. Please explain?

[CLIVE-TRIANGLE]

Why do you have to raise a "BILL". I only raise the "Bill" for accruals or when it falls outside the vat period. Please explain?

You know the old saying: "the truth shall set you free"
It's the same in accounting. You received a "bill" for a legit expense. So process the bill.
Your expenses will be correct.
VAT will be correct.
Creditors will be correct.
There is no reason not process it.

Also, VAT reports will properly reflect the vendor, tax invoice number, date etc.

[CLIVE-TRIANGLE]

In my humble opinion they should be stated as members loans payable and loans receivable using sub accounts (i.e a debit loan account and a credit loan account). They are definately long term liabilities, and they should not touch the equity account as righly said this is for accumulated profits and losses. The way I indicate what the actual loans are in respect of are by using the "Memo" facility in QBooks as it is not so much a tax issue for me but a measurement of how the CC is performing and who funds are being utilised and for what they are being utilised and how often. So I use it more for a tool than anything else.

100% agree.
In cases where the company is repaying a substantial shareholders loan, by paying his insurance, RA, mortgage etc, I make each of them a sub account. Its funny how easy some people can forget how much private expenses are being paid and bemoan the absence of cash flow

[Dave A]

I think there may be some confusion regarding the nature of the rent-to-own / lease agreement we have with our supplier.

The equipment we're buying from them is already in our depot, and we use it on a daily basis. But legally, they still own it. They are selling it to us at a value of X rand. We pay them Y amount per month (the exact amount varies from month to month depending on how much we can afford to pay them on that given month) until the full amount they have received from us from these monthly payments equals X. At that point, the equipment becomes ours. There is no interest rate at play here, and no deposit was payable.

I've been getting some advice on this. The recommendation I've received is to capitalise the asset and show the total liability now, even though ownership is only transferable at the end of the contract.

First, it seems even hp agreements are captured this way nowadays (ties up with Clive-Triangle's post 21).
Second, you can start depreciating the asset straight away.

At issue is showing total liabilities in the financials, and the total value owed under any lease is supposed to be shown. It was mentioned that there's a possible revision to IFRIS for SME's coming on this, but for now it seems off-balance sheet finance is a no no.

[aktorsyl]

Thanks guys, that answers all of it for now. I appreciate all the advice!

[antonnkramer]

Hi. Is this right. If you never pay out through salaries so you don't pay PAYE over, you can leave the debit loan for as long as you like, as long as you charge interest on it.This way, if entity is cash tight to pay SARS, u just pay into the loan account and charge interest? When entity has cash again, it can declare a dividend and pay dividend tax over. How will Sars treat this debit loan if left there for say 2 years? Will it want PAYE on the amounts paid at tax year end?