How to account for a loan made to an employee

[joemate]

Hi all,

Employee Loan £4,000.00 APR3.5%

the company i work for is looking to make a loan with the above settings. How is this accounted for in the balance sheet?

i know the first journal will be:
CdtBank £4,000.00 Dbtother receivables £4,000.00

then each month, there will be an interest amount, and a repayment of £85 taken from their wages. Am i right in thinking that the below is how it is done?

AmountInterestTotal dueRepaidOutstanding28 July 2009 £4,000.00 31 August 2009 £ 11.67 £4,011.67 -£ 85.00 £ 3,926.67

so at the end of month 1:
cdtInterest P&L-£ 11.67 Cdt other receivables £ 73.33 Ddtbank £ 85.00

or am i missing something?

joe

[GRDCredit]

Cannot answer the question but can raise another one!

I assume you have considered the employee taxation - an accountant will be able to tell you for sure but this will, I believe, me taxed as a benefit in kind

Geoff

[joemate]

Hi Geoff, our accountants have already told us that any loans below £5k are not treated as a BIK, so we are covered with that point.

thanks...

[Zeno]

See the tax effect of loans to employees here - http://www.hmrc.gov.uk/paye/exb/a-z/l/loans.htm

Your accounting seems about right although it is a very, very bad idea in general.

[MrPAYE]

See the tax effect of loans to employees here - http://www.hmrc.gov.uk/paye/exb/a-z/l/loans.htm

Your accounting seems about right although it is a very, very bad idea in general.

The accountant is indeed correct.

As for whether it is a good idea or not is up to the employer to judge the levl of risk. In my experience, if the loan is recouped via a reduction to salary then it can be very low risk for the employer and very useful for the employee.

[joemate]

thanks all...We as an employer are happy with the arrangement, but i just want to make sure the accounting side of it is correct...anyone help with that??

[Zeno]

As for whether it is a good idea or not is up to the employer to judge the levl of risk. In my experience, if the loan is recouped via a reduction to salary then it can be very low risk for the employer and very useful for the employee.

But that assumes that the employee will be there for the duration of the loan (4 years). Thereafter it can become decidely tricky.

The only employee loans I have ever come across that have been managed tolerably well are 1 year loans for rail season tickets etc.

It also sets a dangerous precedent as well as bringing a new angle to the employee/employer relationship. I would certainly not care to owe my employer this amount for such a term.

[Zeno]

thanks all...We as an employer are happy with the arrangement, but i just want to make sure the accounting side of it is correct...anyone help with that??

Without knowing exactly how you process the payroll J/Es I cannot say for sure but your current approach seems fine to me.

[joemate]

Zeno,

all I'm trying to do is work out the monthly journal that needs to be posted. Rest assured, all the pros and cons have been exhaustively discussed...

thanks

[joemate]

Hi Zeno, thanks...

the way i would do it is that for every £85 we recover from the employee's wages, about £10 of it pays the interest charge, and the remainder pays some of the loan off. Is that the correct thinking?

[Zeno]

Hi Zeno, thanks...

the way i would do it is that for every £85 we recover from the employee's wages, about £10 of it pays the interest charge, and the remainder pays some of the loan off. Is that the correct thinking?

Broadly but it will become even more complicated with compound interest.

[Woodcrest Accounting Serv]

Hi all,

Employee Loan £4,000.00 APR3.5%

the company i work for is looking to make a loan with the above settings. How is this accounted for in the balance sheet?

i know the first journal will be:
CdtBank £4,000.00 Dbtother receivables £4,000.00

then each month, there will be an interest amount, and a repayment of £85 taken from their wages. Am i right in thinking that the below is how it is done?

AmountInterestTotal dueRepaidOutstanding28 July 2009 £4,000.00 31 August 2009 £ 11.67 £4,011.67 -£ 85.00 £ 3,926.67

so at the end of month 1:
cdtInterest P&L-£ 11.67 Cdt other receivables £ 73.33 Ddtbank £ 85.00

or am i missing something?

joe

Hi Joe,
If I understand you correctly, you are deducting the payment from the employees wages? If so, you would first need a separate entry to Credit interest on the P&L and then debit the other receivables. This entry will increase the liability on the balance sheet each month by the interest amount.

Assuming you are using a salary control account, you would then need to reduce the amount being paid so an entry
to the salary control entry would be
CR £85 Other receivables &
DR £85 Salary Control.
So the £85 would not debit the bank account, unless you paid the employee first and then he/she then paid it back into the bank account.
I hope this makes sense.