Accounting for a loan

westworld

I'm a new sole trader and my family have given me a loan for the the business. Can anyone advise me what the best way of accounting for the loan is - do I put it on the accounts (sage line 50) and pay it monthly as a supplier or create it as a bank account for it or is it easiest just to pay my family back out of my drawings and leave if out of my accounts?

Debt_Free_Chick

I think you would want to put this in your accounts as I'm fairly sure (but you'll need to confirm) that repayments of the capital are not treated as your drawings and therefore you do not need to include them for tax purposes. Any interest would, of course, be a normal business expense and should be tax deductible from your profits. Remember, that everything you earn as profit is classed as "drawings" and becomes your income for tax purposes - hence my feeling that the capital repayments would not be included. So, firstly a call to your local tax office to confirm my understanding.

If I'm correct, then you need to set the loan up in Sage. Here's how I'd do it (I use Instant Accounts, but I guess line 50 is very similar). I assume that you already have Sage set up and you're not planning to put the loan in as an opening balance?

The nominal code for loans is 2300. You could use this or set up a new one with a unique name e.g. Family Loan which should be allocated nom code 2301 (each new code is simply number sequentially, within the range allowed - 2300-2399 for long term liabilities).

Record the receipt of the cash in your bank account and allocate the nominal code for the loan (2300 or 2301 if you set up a new loan account). That gets the cash into the bank and creates a loan for the same amount.

Whenever you want to make a repayment, go to the bank account, make a payment and allocate the nominal code for the loan account. If you are paying interest, you need to show the interest separately and allocate nominal code 7903 for the interest element. The total of the two, capital payments (code 2300/2301) and interest (code 7903) should add up to the actual repayment you're making.

Now then .... before you do any of this .... BACKUP SAGE! Label the backup "pre Loan" and forget about it. Set up the loan have a play around ... run a trial balance and make sure you have no amounts in suspense/mispostings (nom codes 9998 & 9999). Make a few pretend repayments to try out the theory, then run your P&L and balance sheet to see how things look. You should see the capital outstanding on the balance sheet under current liabilities and any interest on the P&L as borrowing costs or interest. Once you're happy, restore the backup and set up the loan account for real.

If, however, the capital repayments are to be classed as drawings (per the tax office) then leave the whole thing out of Sage. When you make a repayment of the loan (either with or without interest), simply show a bank payment to yourself, with the nominal code for owner's drawings.

Post back if you have any problems. And check out the unofficial Sage support forums here

choosewisely

Thanks Debt Free Chick, you should write Sage help files!