Setting up a Line of Credit in Accounting

[Joetta Trimble]

A short time before your website was compromised, I had requested step-by-step assistance in setting up the accounting for our line of credit for a building renovation project. I received a detailed response from John Meyers (thanks, John!), but didn't print it out . Days later, the website was down, and now it appears that all the posts from February 2-19 have been deleted. I called in for assistance and received some advice from one of the phone techs during the time the website was down, but I don't think we're set up correctly.

So, John, if you don't mind, let's try this again.

We have a line of credit at the bank and only recently needed to access it for our renovation project. The first draw of $100,000 was moved by the bank from the line of credit account to our regular checking account. I set up a liability account and credited it in the amount transferred, and debited the bank account. I also set up an interest expense line item for when we start paying that. These set ups were done on the advice of the phone tech, but it seems like there should be some other accounts/entries involved.

Please help! Thanks, and I really missed the forum while it was shut down!

[JohnDMeyers]

If everything is in the General Fund, it looks like this:

Receive money from bank:
DB 01-1110-000 checking
CR 01-1220-000 liability

Pay for an expense:
CR 01-1110-000 checking
DB 01-5870-000 some expense

Make a payment ($1000 total, $400 principle, $600 interest) on the loan:
CR 01-1110-000 checking $1000
DB 01-1220-000 liability $400
DB 01-5880-000 interest expense $600

If there is another fund involved, please let me know.

[Joetta Trimble]

Thanks! This will do it. It's what I thought, but couldn't get my head around it.

[Joetta Trimble]

OK, John, I need more help! When I made a large ($200,000+) payment to the building contractor, I paid it all from the Building Renovation Fund expense account, but the $100,000 we had moved from the line of credit needed to be used for part of that payment. Now the equity account that our renovation income and expense accounts close to shows a negative balance. Is there a way to show the loan money as now being available to spend on our expenses without having the negative balance on our reports?

Thanks!

[JohnDMeyers]

Just let me think this through:
----------------------

If all you had in your church was $100,000 in cash that was raised for the building, and $250,000 in assets and nothing else:

You have $350,000 in total equity ($100,000 cash and $250,000 assets).

Then, you get a bill for $200,000. I assume this adds $200,000 to your assets. You borrow $100,000 to add to your cash.

------------------
On the assets side:
You now have $250,000 beginning assets, $200,000 in new assets, $100,000 in "old" cash and $100,000 in borrowed cash. That adds up to $650,000 in assets.

On the equity and liability side:
You had $350,000 in total equity. You paid a $200,000 bill, and you borrowed $100,000. That's $650,000 in equity plus liability.

------------------------ everything above is fine --------

If you have a separate equity account for your building income, you only had $100,000 in income. You had $200,000 in expenses. That's a negative, right there.

--------------conclusion------------------

You should show the $200,000 as an increase to assets, not an expense.

I hope this thought process benefits someone.

[Joetta Trimble]

Thank you! It helps and I appreciate your thought processes. Have a great rest of the day!