Loan, Interest, and Repayment

Transcript

Loan ,Interest and Repayment What is Loan? It is the amount borrowed by one person from another Is Loan Asset or Liability in Accounting Equaiton If we are taking loan, Loan taken is a liability If we are giving Loan Loan given is an asset Suppose A gives Loan to B Loan A ---------------------> B <------------------ Loan Repaid I I For A For B it is Loan Given It is Loan taken (Asset) (Liability) I I This Asset Increases This Liability increase when loan given when loan taken This Assets decrease This Liability decrease when loan Repaid when loan repaid Who is Lender or Borrower? A is lender B is borrower Question 1 A started a new business with Rs 100000 initial amount and borrowing from sister Rs 200000 Later he Repaid 50000 back to his sister (Remaining 150000 pending) All transactions in cash Prepare Accounting Equation Ans In this case ,there are total 3 transactions (One for Capital and 2 for Borrowing) Transaction 1 A started a new business with Rs 100000 initial amount and borrowing from sister Rs 200000 Effect Cash is an Asset which Increases by 300000(100000+200000) Loan is a liability which increases by 200000 Capital also increases by 100000 So Accounting Equation appears as follows Assets = Liability + Capital Cash Loan Cash Introdued into business as Capital Rs 100000 and loan 200000 300000 = 200000 + 100000 Transaction 2 Amount repaid to sister Rs 50,000 Effect Cash is an Asset which decreases by 50000 Loan is a liability which decreases by 50000 So Accounting Equation appears as follows Assets = Liability + Capital Cash Loan Old Balance 300000 = 200000 + 100000 Amount repaid to sister Rs 50,000 -50000 = -50000 + 0 New Balance 250000 = 150000 + 100000 What is Interest on Loan It is the amount charged by lender to borrower for use of money Example Mr B took loan from Bank for Rs 100000 @ 12% for 3 months on 1 Jan Interest on Loan =100000*12%*3/12=3000 Loan Repaid by Mr B ==103000 Loan 100000 Bank -----------------------------------> B <-------------------------------------- 100000 Principal +3000 interest I I It is Lender It is Borrower I I He Receive Interest He pays Interest I I It is an Income It is a Expense Effect on Accounting Equation Loan 100000 Bank -----------------------------------> B <-------------------------------------- 100000 Principal +3000 interest I I Loan Given Loan taken Cash paid- Amount Received in bank Decreases the Assets Increases the Assets Loans and advances- Loan Increased- Increases the assets Increase the liability Interest Income Interest Expense Interest is income- Interest is Expense leads to Increase in Profit leads to Decrease in Profit so increase in Capital. so Decrease in Capital Loans and advances- Loan Amount Increased- Increases the assets Because of interest Increase the liability Loan Repaid Loan Repaid Amount Received, Amount Paid, Increase in Assets Decrease Assets Loan and Advances will reduce, Loan Decreased, Decrease in Assets Decrease liability Question 2 Mr Amit commenced business with Rs 50000 Capital by transferring from Savings Account to Current Account He took loan from bank of Rs 40000 Interest on loan =Rs 6000 Loan Repaid 46000 Prepare Accounting Equation Transaction 1 Mr Amit commenced business with Rs 50000 Capital by transferring from Savings Account to Current Account Effect Bank is an Asset which Increases by 50000 Capital also increases by 50000 So Accounting Equation appears as follows Assets = Liability + Capital Bank Mr Amit commenced business with Rs 50000 Capital 50000 = + 50000 Transaction 2 He took loan from bank of Rs 40000 Effect Bank is an Asset which Increases by 40000 Loan is a liability which Increases by 40000 So Accounting Equation appears as follows Assets = Liability + Capital Bank Loan Old Balance 50000 = + 50000 He took loan from bank of Rs 40000 +40000 = 40000 + 0 New Balance 90000 = 40000 + 50000 Transaction 3 Loan Repaid 40000 and interest 6000 Effect Bank is an Asset which Decreases by 46000 Loan is a liability which Decreases by 40000 Interest paid will decrease the capital by 6000 So Accounting Equation appears as follows Assets = Liability + Capital Bank Loan Old Balance 90000 = 40000 + 50000 Loan Repaid 40000 and interest 6000 -46000 = -40000 + -6000 New Balance 44000 = 0 + 44000 What is Accrued Interest Example Mr B took loan from Bank for Rs 100000 @ 12% for 3 months on 1 March When is this Interest to be paid? It is to be paid after 3 months on 31 May What is the interest amount accrued on closing books of 31 March Interest on Loan =100000*12%*1/12=1000 Date of Date of Date loan Repaid Loan taken Balance sheet (With interest) 01-Mar 31-Mar 31-May Interest Accrued for 1 Month 1000000*12%*1/12=1000 Interest Paid for 3 Months 1000000*12%*3/12=4000 What is Accrued Interest It is the interest which has been incurred for a particular period but not yet due it is recorded while closing books on accounts ` Is Interest Accrued Income or Liability? Mr B took loan from Bank for Rs 100000 @ 12% for 3 months on 1 March Interest Accrued till 31 March =100000*12%*3/12=1000 Loan Bank -----------------> B (lender) (Borrower) I I For Lender For Borrower Interest Accrued Interest Accrued is Asset is Liablity (He has to Receive Interest) (He has to Pay interest) Effect on Accounting Equation Effect on Accounting Equation Asset increases liability Increases Interest Income increases Interest expense increases So Profit Increases So Profit Decreases So Capital Increases So Capital Decreases Question 3-Interest Accrued (Liability) Mr Amit commenced business with Rs 50000 Capital by transferring from Savings Account to Current Account He took loan from bank of Rs 40000 Interest Accrued on loan(Interest Outstanding) =Rs 6000 Prepare Accounting Equation Transaction 1 Mr Amit commenced business with Rs 50000 Capital by transferring from Savings Account to Current Account Effect Bank is an Asset which Increases by 50000 Capital also increases by 50000 So Accounting Equation appears as follows Assets = Liability + Capital Bank Mr Amit commenced business with Rs 50000 Capital 50000 = + 50000 Transaction 2 He took loan from bank of Rs 40000 Effect Bank is an Asset which Increases by 40000 Loan is a liability which Increases by 40000 So Accounting Equation appears as follows Assets = Liability + Capital Bank Loan Old Balance 50000 = + 50000 He took loan from bank of Rs 40000 +40000 = 40000 + 0 New Balance 90000 = 40000 + 50000 Transaction 3 Interest Accrued on loan(Interest Outstanding) =Rs 6000 Effect Accrued Interest is a liability which Increases by 6000 Capital will decreases by 6000 as it is an expense So Accounting Equation appears as follows Assets = Liability + Capital Bank Loan + Accrued Int Old Balance 90000 = 40000 + 50000 Interest Accrued on loan(Interest Outstanding) =Rs 6000 = + 6000 + -6000 New Balance 90000 = 40000 + 6000 + 44000 Question 4 Interest Accrued (Asset) Mr Sumit commenced business with Rs 500000 cash He got FD made in Bank of Rs 400000 by depositing cash On This FD,Interest accrued is Rs 4000 Prepare Accounting Equation Transaction 1 Mr Sumit commenced business with Rs 500000 cash Effect Cash is an Asset which Increases by 500000 Capital also increases by 500000 So Accounting Equation appears as follows Assets = Liability + Capital Cash Mr Sumit commenced business with Rs 500000 cash 500000 = + 500000 Transaction 2 He got FD made in Bank of Rs 400000 by depositing cash Effect Cash is an Asset which Decreases by 400000 FD is an asset which increases by 400000 So Accounting Equation appears as follows Assets = Liability + Capital Cash FD Old Balance 500000 = + 500000 He got FD made in Bank of Rs 400000 by depositing cash -400000 +400000 = + 0 New Balance 100000 400000 = + 500000 Transaction 3 On This FD,Interest accrued is Rs 4000 Effect Accrued Interest is an Asset which Increases by 4000 Capital will increase by 4000 as it is an income So Accounting Equation appears as follows Assets = Liability + Capital Cash FD Accrued Int Old Balance 100000 400000 = + 500000 On This FD,Interest accrued is Rs 4000 +4000 = + 4000 New Balance 100000 400000 4000 = + 504000