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We have a loan account wherein the interest charged is paid from our bank account. This was the usual practice. Now we had a benefactor who offered to pay the interest for this month. There was no change in our loan account balance as only the interest payable was made. The amount of interest paid by the benefactor was $2500. There was no payments or debits made from our bank account.
Can anyone advise if I still have to make a journal entry similar to Debit interest expenses for $2500 and credit entry of some sort of income like Income from Benefactor. I can create one.
Or is this unnecessary as there was no movement in our bank accounts and did not affect my bank reconciliation. I am using MYOB Account Right version 19 and we are on cash accounting method.
Please help. thanks
March - last edited March
Your suggestion " make a journal entry similar to Debit interest expenses for $2500 and credit entry of some sort of income (Income from Benefactor. I can create one"
This is what I would do, although for the income account I would use a Capital Introduced Account naming the benefactor. This will save you picking up the income in the Profit and Loss Account and maybe paying tax on it.
Of course it is always a good idea to ask your accountant as he/she will be answering any queries brought up by the Tax Office
What a nice situation to be in.
The question becomes do I want to recognise the loan on the books of the company or do I consider it a loan to the Owner/Director which they have then used on behalf of the company.
Consider the situation that if the business was to cease trading in a months time.
Where the injection of funds is from an unrelated person, there would be an expectation that the funds are a liability that would need to be repaid.
This should be treated as a loan under the Liabilities (Loan - J Smith) and setup as a Credit Card type . Money is spent from that account to the Interest Expense Account.
If the money is from Bank of Mum and Dad to a Director it may be that there is no formal expectation that the money would be repaid. Here it could be recorded as under the Director's current account as a spend money from that account.
Thanks for your reply. This is a church non profit with no directors in our balance sheet. We have retained earnings in our balance sheet. The church has been around for 135 years and I see no chance of it closing down in the near future. The benefactor does not expect payment. So can I just treat this as an income account which I can create such as other income . Or should I just ignore this transaction altogether as this had no bearing in our bank accounts.
Thanks for your reply. We are a church, non profit and dont pay any tax so we dont need to report income to ATO. Can I just do the journal entry debiting interest expense and crediting other income benefactor?
A little church that we look after does report to the ATO so that they can use GST paid to offset their PAYG account. I assume that your PAYG is paid from a central fund.
Back to the Donation - I would be recognising it as such - whether it sits as Income or Other income does not matter. You could then either journal it to Interest Paid or use the real bank as a clearing account.