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Getting ready for Year End

Trying to get my head around this and looking for clarification.

Situation setting up the 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

Reply to
John Pippy
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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.

Reply to
Allan Martin

Has your lender sent you a loan statement indicating:

1) the opening balance of the loan 2) principal paid to end of year 3) interest paid to end of year?

You will need to account for that in your year end as well.

Is your depreciation rate correct? Is it the correct depreciation method to be used in your tax jurisdiction?

The loan payments affect the Balance Sheet, not the P&L. You are decreasing a liability by decreasing an asset. Both are BS items.

Your depreciation adjustments DO affect the P&L, you are reducing the book value of the asset by moving a portion from the asset value to expense. IE. reducing a BS amount (technically increasing a contra-asset account value) and increasing the depreciation expense.

Also, when you properly book the interest expense, you are affecting the P&L as well, since you are increasing the P&L account.

Do you have an amortization schedule from the lender? Is the interest rate fixed? If yes, and you have the year end loan statement, you can calculate the interest rate and generate your own schedule and use it to book your loan payments monthly with a correct principal and interest payment.

Stephanie

John Pippy (remove me to resp> Trying to get my head around this and looking for clarification. >

Reply to
S.M. Serba

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