Accounting for a Loan

[tclarke]

We recently took out a loan to remodel the parsonage. I deposited the check from the lender into our checking account and have paid some invoices from the contractor.
What is the best way to handle this from an accounting standpoint? Should I set up a separate fund for the loan? Is the loan considered income? When I start repaying the loan is the entire payment an expense or just the interest?

[Matt]

I do not think you need to set up a separate fund for the loan. A loan is not income. When you took out the loan you should have recorded an accounting entry similar to this:

Debit Checking Account
Credit Liabilities - Remodel Loan

I would recommend setting up a separate expense account specifically to keep track of the remodeling expenses.

When you start repaying the loan, you should split the payment amount between principal and interest. If, for example, the loan payment was $500.00, of which $350.00 was principal and $150.00 was interest you would record this payment as follows:

Debit Liabilities - Remodel Loan $350.00
Debit Interest Expense - Remodel Loan $150.00
Credit Checking Account $500.00

[tclarke]

Thanks, Matt
I did as you recommended, however, when I printed out a monthly Income and Expense Statement, the loan did not show up as income (because it is not income) so there was nothing to offset the remodeling expenses. Just looking at this one report it looks like we went in the red, big time. Is there another report that would show a more accurate picture of our financial situation for the month? Or should I just put a footnote on this report explaining why the expenses look so high? Any advice?

[Matt]

Please see my post this evening on the topic "Mortgage Incorrect on Balance Sheet". This is essentially the same problem. Once again, the average non-accountant does not understand the theoretically "correct" way of accounting for loan proceeds and payments in regards to the effects on the income and expense statement and the balance sheet. As I mention in my reply to the above referenced topic, they correlate an increase to the checking account balance with income and a decrease with expense.

Accordingly, in order for you to accomodate both the requirement to properly report the loan liability on the balance sheet, yet eliminate the problem with the income and expense report looking like you "went in the red, big time" you will need to record the accounting entries for the loan as follows. Let's assume the remodel loan was $20,000 and the payment is for $500, broken down into $350 principal and $150 interest.

1). To record the initial loan:

Debit Checking Account $20,000
Credit Remodel Loan Proceeds (Income) $20,000

Debit Unrestricted Net Assets $20,000
Credit Remodel Loan (Liability) $20,000

2). To record the loan payment:

Debit Remodel Loan Payment (Expense) $500
Credit Checking Account $500

Debit Remodel Loan (Liability) $350
Credit Unrestricted Net Assets $350