Recording purchase of an asset/chattel mortgage (Level 1 & 2).

Recording purchase of an asset/chattel mortgage (Level 1 & 2).

Recording purchase of an asset/chattel mortgage (Level 1 & 2)

A  Chattel Mortgage  is a type of loan typically used to purchase motor vehicles or other major business equipment. It is called a “mortgage” because the financier retains the title of the item purchased until the final payment is received.

There are several financial benefits of a Chattel Mortgage including:
  • The GST is claimable at the time of the purchase regardless of whether you account for GST on a cash or accrual basis.
  • The allowable depreciation and interest payments are tax deductible.
  • The full amount of the purchase can be financed including an upfront deposit and/or trade-in.
  • The asset purchased automatically belongs to the buyer and the title is transferred upon final payment.
  • Cash flow is kept under control because the business can borrow the funds rather than spend current savings and can also factor the repayments into its monthly forecast projection.

 

Cashbook Level 2   only  has  Banks ,  Income  and   Expenses   account categories in the  Chart  of account. (No Assets, Liability or Equity account categories.)

To record the purchase of the asset (in order to claim GST) via the Chattel Mortgage loan:

Step 1. Set up a Loan Account:

  • Click on  Chart   toolbar option.
  • Click on  Add  button.
  • Account Code:  e.g. 083
  • Description:   e.g. Loan from Finance Company.
  • Account Type:  Other Income
  • GST Category : 11. Non-reportable Receipts.
  • Click  OK  to save.

 

Step 2. Set up a Purchase of Asset Account:

  • Still in  Chart .
  • Click on  Add  button.
  • Account Code:   e.g. 190
  • Description:  e.g. Purchase - Plant & Equip..
  • Account Type:   Other Expense.
  • GST Category : 08. Capital Acquisitions.
  • Click  OK  to save.

Note: Other Income and Other Expenses are those items that don't occur during the normal course of business operation.
For example: To record the purchased a lawn mower via a chattel mortgage, in order to claim the GST.

Step 3. Need to do a Cash Journal:

  • Click on  Cashbook  toolbar icon.
  • Click on the  Add  button.
  • Click on the  Cash Journal  radial dial.
  • Transaction should be entered as follows:

Click  OK  to save.

 

To record repayments:

Step 1. Set up a Repayment Account:

  • Click on  Chart  toolbar icon.
  • Click on the  Expenses  tab.
    • Click on the  Add  button.
    • Scroll down your list to where  Other Expense  accounts are located. Your new account code should be located within this area.
    • Account Code  e.g. 188
    • Description  e.g. Loan Repayments - Lawn Mower
    • Account Type  Other Expense
    • GST Category  10. Non-reportable Payments
    • Click on the  OK  button to save.

 

Step 2. Set up an Interest Account:

Note: You can use your existing  Interest Paid  account, but you need to be pedantic about entering the interest details in the Notes (Optional) section when entering your repayment transactions, or you can create an interest paid account specific to this loan repayment.

  • Still in  Chart .
  • Click on the  Expenses  tab.
  • Click on the  Add  button.
    • Account Code  e.g. 136 (Select an account code near existing Interest Paid account.)
    • Description  e.g. Interest Paid - Loan
    • Account Type  Operating Expense
    • GST Category  04. Acquisition with no GST
    • Click  OK  to save.

 

Step 3. Repayment transaction:

Note:  If you have not been provided with a finance schedule by the finance company and you do not know how much of your repayment is principal and how much is interest, you can either:

  1. Ring the finance company and ask them to send you the finance schedule, or
  2. You can allocate all of the repayment to the Loan Repayments account and your accountant can calculate and reallocate at the end of the financial year. 
  1. Click on the  Cashbook  toolbar icon
    1. Click on the  Add  button
    2. Click on the  Payment  radio dial
    3. Date  i.e. date of repayment
    4. Reference  e.g. D/DEBIT if the money is automatically taken out of your bank account each month
    5. Paid To  i.e. name of finance company
    6. Gross Amount  e.g. $300
    7. Dissection Details  see example below
  2. Click  OK  to save



Article ID 1715