[Felix The Cat]

Good Afternoon,

For a payday loan company client who issues a loan to a customer, they have the following JE’s:

Dr. Accounts Receivable- Principal $1000
Cr. Bank $1000

Dr. Accounts Receivable- Interest $ 100

Cr. Interest Revenue $ 100

The issue is, the customer hasn’t paid back the loan yet (they just received the loan), so I believe the revenue recognition is too aggressive, since how could they recognize revenue if customer hasnt paid it yet?

If we wanted to recognize interest revenue at the point of repayment from the customer, what should we credit instead?

Thank You

[calvinus]

To use cash basis instead of accrual basis:

Dr. COGS 1,000
Cr. Bank 1,000

Dr. Bank 1,100
Cr. Sales 1,000
Cr. Interest income 100

[Felix The Cat]

calvinus wrote:

To use cash basis instead of accrual basis:

Dr. COGS 1,000
Cr. Bank 1,000

Dr. Bank 1,100
Cr. Sales 1,000
Cr. Interest income 100

Thank you.

COGS is only if its a merchandising concern.

This is a payday loan company, The 1000 you get back when the borrower repays you.

2) Your second entry is when he repays you, the question I am asking is what is the entry for the interest portion

at the time of of issuing the loan /

Hoping someone can provide a proper answer.

[calvinus]

Under cash basis, you don't recognize income until it's received. This is why the accrual method is preferred.

I chose COGS because it flows better on the income statement. But any expense account is fine.

[Mick]

Hi Felix, under the accrual method, the company will accrue the interest monthly to recognized interest income until the load is paid back. This is because the company has earned the interest on the loan for every month the loan is still outstanding. If the loan is at 5% for the year and the outstanding balance on the loan is $1,000, an entry will be made every month to debit interest receivable for about $4.17 and credit interest income for $4.17.

This a simple example and there may be other caveats but I hope this helps.

REG 55,53
AUD 80
BEC 60
FAR 74, 70

[Recked]

There could also be a loan origination fee or similar that is “earned” as soon as the loan is written.

[Author]

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