In March 2021 (previous tax year), I received a BBS loan which entered our current account.
This was tagged as a “loan”.
I had not created another separate loan account, which from what I have read I should have done.
This month was the first month capital + interest has been paid back to the bank (still waiting for the bank to tell me how this has been split as it only appears as one direct debit in my bank statement).
How do I tag this entry so that it starts to chip away at the loan?
Do I need to create a separate loan account? If so, how do I cancel out how I have ear marked the original loan (if that is what I am supposed to do).
When you say it is Tagged as loan, I would assume you tagged it to the default code of 2300.
Can you check in Reports > Chart of Accounts (Assets and Liabilities (0001 - 2999) section) and look under 2300 to see if it shows in there?
Thank you for your explanation.
One final thing, each month the amount loaned increases due to the interest due.
How do I account for this? I have a feeling that it may be easier to transfer (somehow) the 2300 entry in to a loan account (like a bank account) and manually increase this figure every month once I know what it is.
Unfortunately, it would not work it out automatically as usually the capital to interest would change over the course or the loan(more in favour of interest at the start and less towards the end).
I would imagen you would have had a breakdown of the repayments within the loan documentation when you took out the loan.
Generally speaking, if you have tagged the initial loan to account 2300, then you would recognise the interest each period by creating a journal to debit interest paid, and credit 2300. Thus the loan increases by the amount of the interest, and the interest amount is shown in the P&L as an expense. The repayments then just get tagged to 2300 to reduce the liability. The interest journal can be done monthly if you wish or you can leave it until the year-end.
The exception to this is in the first 12 months after you received the loan. As this is a BBL, in the first 12 months the government paid the interest. You therefore need to recognise this by creating a journal to debit the P&L with 2.5% interest and credit other income. If you need to split this over two accounting years, pro rata the amount by the number of months that fall in each year.
In terms of how much interest to charge to the P&L - this depends on whether you are a micro-entity using FRS105 for your accounts, or are using FRS102. Your accountant will be able to tell you this if you don’t know, or check your last set of accounts.
If FRS 105, then interest is recognised on a straight-line basis over the lifetime of the loan, i.e. 2.5% per annum divided by 12 for the monthly amount. What the bank tells you the interest portion is is irrelevant for the accounts.
If you are on FRS102, it is more complicated, and your accountant should do the necessary calculations as part of preparing your accounts.
