How Do You Budget Loan Payments?

[Ronz]

How do you handle long term loan payments in your budget? i.e. interest and principal? I'm wondering if we are doing something wrong. Here's what we do:

To my accouning knowlege, money received from long term loans should be credited to a liability account. (and debited savings asset account) That's the principal. We did that.

Then when we make a payment to the loan, we debit that liability account with the part of the payment that is principal. That reduces the principal liability. Then we debit an interest expense account with the part of the payment that is interest.

That works fine. But we need to budget for those loan payments. We budget a monthly amount for the interest expense. That works fine too.

We budgeted the monthly amount for the principal libility account. (We have to. We are paying that known amount out every month.) That's where things get strange:

1. When we print out an Income Expense report that has budgeted amounts on it, the budget totals for income and expenses appears out of balance because it does not include the loan principal budgeted account.

2. On the budget printout, the actual amount in the principal liability accout is a negative amount. We budget a positive amount. So they get ADDED for the budgeted amount remaining.

We like to have a balanced budget. Income=Expense+Liability for the year. We have to manually add the loan liablilites to the expenses to see if it banlaces. I sure wish PowerChurch's reports would do that.

We used to have to manually add up all income and expenses totals from each fund to check for balance, but now we have a policy to balance the budget within each fund. I'd still like totals on the reports. It would be nice if PC also had a line that showed Income-(Expenses+liabilites).

Any insights from anyone?

Ron Zastovnik
Memorial UMC, Clovis, CA

[Kristi]

Ron,

1. When we print out an Income Expense report that has budgeted amounts on it, the budget totals for income and expenses appears out of balance because it does not include the loan principal budgeted account.


That is because the principal is not expense, it will appear on the Balance Sheet.

Our Finanace Committee also agreed that it needed to appear on the Budget for the expense balance to appear "correct". We did budget it. That only made the Annual Budget column correct. Then the line item on the Inc/Exp was wrong...it appeared that I never paid the principal...that's because (again) it's not a expense, so it would not show up on this report.

We have not budgeted it again since.

However. When we do our pledge drive, I have an Excel worksheet that I include this total on as a footnote, for the Administrative Board to see the actual budget being requested.

Kristi

[Ronz]

Kristi,

It sounds like you work at our Church! Your history of this problem is almost exactly like ours.

Here is basicly how we budgeted loan payments as an expense a few years ago:

We had a budgeted expense line item for the loan payment. When paid, we credited checking and debited the expense line for the full loan payment.

Then we put in a correcting entry: We debited the liability line for the amount of the loan priciple which reduced the principle and credited a special expense line which canceled out the principle amount from total expenses. That special expense line was not budgeted.

That actually worked, but I'm not sure if it is an accepted accounting practice.

That is a simplified explaination of how we did it. We actually were doing that across funds which made it complicated. Nobody could understand what was going on. Maybe doing that all in one fund would be easier.

I just wonder how it is done in business. Companies surely have lots of big loans that they have to budget the pay back and account for it.

Thanks for your reponse to this!

Ron