I just paid off a bank loan early. I wrote a check the same as I did every month for my regular payments, only this time it was for the full amount remaining. However, this was not the full amount listed under the Long Term Liability for the bank note. There is still a sizable chunk left over (expected interest payment that I won't be making). What is the best way to clear the liability acount of the balance?
Use a General Journal Entry to: If Loan Liability balance is a credit balance - debit loan liability and credit loan interest expense. If Loan Liability is a debit balance then reverse the entry.
Cat
Call up your accountant. If the liability already reflected the interest then how was this originally entered? Is there some sort of contra or prepaid interest account set up on the books?
When I took out the loan, I created a Long Term Liability for the vehicle, and debited that account by the total amount of the loan - principle plus intrest that I would pay. Since I paid off early, much of that intrest will not be paid.
Use the money you saved for an professional accountant. Based on your post you need one.
That is very helpful advice, but if I wanted to hire an accountant I would. What I'd rather do, is run and manage my business myself, and learn along the way, hence posting questions to newsgroups such as this. Have I done something terribly wrong in the accounting procedures I've described? If so, why not explain where I have erred rather than a pointless and uncalled for attack on my knowledge of accounting. You have not aided me, nor anyone else who might read this thread at a later time while attempting to ascertain some accounting knowledge for themselves. In other words, if you don't want to share an answer with the group, then keep your comments to yourself.
You can hire me to handle this inquiry for free :)
When you set up the original entry, you credited a long term liability, but what account did you debit? Let me give you the general scenario, and that should tell you what entry you need to make now. When you first borrowed the money, you should have debited cash and credited loan payable, for the principal amount of the loan. Each time you made a payment, you should have credited cash for the amount of the payment, and debited interest expense for the interest portion of the payment, and debited loan payable for the principal portion of the payment. Had you done it that way, your ledger would always show the correct 'loan payable' balance. If you paid off the loan at any point, you would write a check for the balance shown in your ledger and end up with a zero balance.
That brings me back to the original question...what account did you debit when you set up this loan at an amount equal to the total payments (both interest and principal) that you would have paid had you mot paid off early? You can probably figure out what to do based upon what I have told you already, but if not, give me the original entry and I will gladly provide the answer.
BTW, you're welcome :)
Jimbo already told you. He debited the vehicle for the cost of the vehicle plus interest.
Just in case you did not know. Allan Martin is the price you must pay when you want to fead at the public trough.
Jimmy, If you want to diy go to a used book store and buy a basic accounting text. If you have filed a tax return based on the transactions you described here, you have most likely overstated depreciation and understated interest expense. As I understand it, this group is not to explain accounting procedures and principles but rather how to apply them with QB.
Macy
Its my bridge dude.
Thank you Macy,
That is why I sugested our boy Jim Bo seek out a professional.
Got it. Ok, so here's the answer:
(For purposes of this example, the vehicle cost $14,000, total interest was $2,000, 20 payments @ $800, 15.7%, no down payment)
Original entry:
dr. Vehicle (for the cost of the vehicle) 14,000 dr. Vehicle (for the interest to be paid) 2,000 cr. Loan payable (for the total of the payments to be made, both principal and interest) 16,000 (assume 20 payments @$800, 15.7% loan)
Let's say we have paid 10 payments @ $800 (total of $8,000), and now we pay off the loan. Since you debited Loan payable and credited cash each time you made a payment, after ten payments you paid $8,000, and your loan payable balance (per your ledger) is $8,000. Your payoff amount (yes, I ran an amortization schedule) is $7,455. Here's are the entries:
AJE #1
dr. Interest expense $2,000 cr. Vehicle $2,000
To reclassify the total interest to be paid
AJE #2
cr. Cash 7,455 dr. Loan payable $8,000 cry Interest $545
To record early payoff of loan and adjust interest expense to actual
That does it. And to prove that we are correct, your 'net' interest expense will be $1,455 (which is the amount you originally set up, 2,000, less this entry of 545). I summed the interest portion of the first ten payments, per my amortization table, and found that the aggregate interest for the first ten payment is $1,455.
Lastly, you're welcome.
(I will check back after April 17th to see if there are/were any additional questions.)
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