I'd say go with Long-term. I have no idea what Quickbooks is referring to when they term it "fixed".
I'd say go with Long-term. I have no idea what Quickbooks is referring to when they term it "fixed".
Ok, so long-term with zero interest? Also, I assume it is standard practice to have money that the member loans FROM the company also reflect in his loan account?
Hi aktorsyl. Quickbooks will only give you two options when creating the liability, 'Other current liability' and 'Long term liability'. You should select Long term, unless you reasonably foresee that the loan will be repaid in 12 months.
The CC's Accounting Officer will determine the correct classification when he prepares the Financial Statements. To explain more fully:
- The part of the loan that is not expected to be repaid within the 12 months after date of year end, is treated as long term. This may be the entire loan.
- The part of the loan that IS expected to be repaid within the next 12 months, is treated as current. This may be the entire loan.
The presence of a loan agreement simplifies this.
The absence of a loan agreement is not necessarily an issue, because the classification in the notes to the AFS may simply say that "no repayments within the next 12 months are expected."
Interest would depend on the loan agreement, or if there is none, then the agreement between the members as to whether the loan attracts interest.
Credit loan balances (money loaned to the CC) don't have to have interest charged, unless it is part of the loan agreement.
Debit member loan balances (money loaned by the CC) can become particularly complicated when you consider SARS's view on debit member loan balances. Generally, you will want to charge interest on a member's debit loan balance, if there is still an amount payable to the CC at the end of a financial year. The reason for this is two-fold:
1) SARS may deem the interest that would have been charged on the loan (at the SARS recommended rate) to be a fringe benefit taxable in the member's hands.
2) SARS may deem the loan to actually be a dividend, and demand dividends tax (from 1 April 2012) be paid on the debit loan.
Simplest solution, in most cases, is just to ensure a loan to a member is conducted at arms length, in that interest is charged thereon at the SARS recommended interest rate (currently 6.5%).
Regarding your query about the debits and credits - yes, you'll treat all money in and money out between a member and a CC as part of one account (his member loan account). There's no need to show debits and credits in separate accounts in this case.
Thanks guys, appreciate the help so far.
Few more questions:
1) The member who paid the invoices in the previous financial year, on behalf of the CC, needs to somehow be reimbursed. However, since he didn't lend the money directly to the CC, it'd be tricky to classify that as a liability/loan. We have the original invoices that he paid. Will it work if I capture those invoices on Quickbooks, then "pay" them by transferring the money into his bank account? In other words, we pay the invoices according to the system, and he gets his money back. Does this make any sense?
2) We have a rent-to-own / lease agreement with a 3rd-party company for equipment, where we pay X amount per month until the full sum has been paid off, after which we take possession of the equipment. There is no interest on this agreement. Can we add this as a long-term liability, or is SARS going to frown on that? It's quite a large amount. If we do add it as a long-term liability, the liability account will gradually decrease as we make payments, and once it reaches zero, the fixed assets accounts will suddenly increase by the full value of the equipment, am I correct?
3) If we do add the rent-to-own / lease agreement as a long-term liability, do we add an entry to the liability account with the date matching the date on which the agreement was signed? With an entry amount equal to the total value of the equipment?
4) What is the best way to remunerate the members? It'll be a profit share: in other words, on the 1st of each month, a pre-defined portion of the previous month's profit will be divided between the members as per their member's interest. What's the best way to do these payments in a simple manner? Do you classify it as dividends? Do you have to subtract tax from the dividend before paying it over to the member? Or can the members just invoice the CC every month for "consulting", the invoice amount being the amount they're supposed to get as per the profit share for that given month? Would this be legal/acceptable?
Last edited by aktorsyl; 10-Mar-12 at 01:47 AM.
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.
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?
Last edited by aktorsyl; 10-Mar-12 at 05:00 AM.
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.Originally Posted by aktorsyl
And then periodically post the balance to the member's loan account.
Participation is voluntary.
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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.
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.
Participation is voluntary.
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