Am I on the right track - second posting

Question

Can anyone take a look at what I have done and let me know if I am on the right track.

Situation getting ready for year end.

Beginning of fiscal year I got a loan from the bank to purchase a utility trailer for $15,000. I then set up a fixed asset account for $15,000 including sub account for accumulated depreciation and an account for depreciation expense. I then set up a Long term liability account for the amount of the bank loan $15,000.

Ok when I go to enter a payment on the loan I go to write cheques and credit the long term liability account for the trailer I then go and write another cheque to record the interest expense.

I also credited the accumulated depreciation for past year $2,250 and debited depreciation expense $2,250

So far I want to know if I have done this correct.

Finally, would someone please explain the effects could someone explain the effects of this transaction on the balance sheet and the profit and loss statement. For example is there any affect on the P & L sheet due to the loan payments I made the past many months?

Thanks,

John

Allan Martin · Accepted Answer

See previous reply.

Allan Martin · Answer

Proper accounting would require two accounts for the loan, the short term portion and the long term.

Does the bank require two separate checks, one for principal and the other interest?

I would image a utility trailer would have a class life of 5 years, therefore 200%DB would be in order rather than the150%DB you took. There is always the matter of taking a section 179 deduction which should also be considered.

No paying off the princpal on a loan has no effect on the profit and loss.

John Pippy · Answer

Thanks Allan for responding,Could you explain this a little bit more?On my bank statement, there is a debit for the loan payment and then a seperate debit for loan interest

Victor · Answer

Hi John,You were right in the beginning by debiting the asset account andcrediting the liability account. You were also right with thedepreciation account. Now when you make the payment for the principalamount write a check and debit the loan account and credit the cehckingaccount and when you write a check for the interest, debit interestexpenses account and credit the checking the account.The effects will be as below:1 Loan account will be shown in the liability side of the balancesheet. The amount will be reduced value of the loan i.e. afterdeducting the principal repayments. The P/L will be debited by theinterest amount as well as the depreciation for that year. The value ofthe asses will be shown in the asset side of the balance sheet. It willbe actual value less the accumulated depreciation.I hope this helps. If not, then please let me know.Warm Regards,Victor

Am I on the right track - second posting

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