Accounting for Loan Payment

[cruiser]

A member of staff received a loan from the bank on the proviso that the repayments were made through the employer. The staff member is to have the weekly deduction taken from his NET salary figure by the employer and the repayment to the lender will come from the employers bank account (The bank required a Guarantee that repayments would be made).
How should this transaction be input into Sage bearing in mind that no monies were actually received by the company but that the repayment shows as a regualr transaction in the companies bank statement ?
Any assistance would be greatly appreciated.

[brucedenney]

It depends.

How you you account for wages right now?

The "proper" way to account for wages is to do a journal to put the costs and liabilities into separate accounts and then make payments from those.

However a lot of people just make payments against accounts and leave the accountant to sort things out later.

If you can give an example of how you do it now, I can suggest how you might change it.

[cruiser]

My monthly journals are as follows:

Db Gross Wages
Db PRSI (Employer)
Cr PRSI (Employer & Employee)
Cr Net Wages
Cr PAYE

Hope this helps

[brucedenney]

So Net Wages contains the amount that is paid to the employees and after the payment to the staff, this account returns to a zero balance when the payments are made.

When you now pay, because you have deducted the load from the wages this will not go to zero.

You could do one of two thing, you could make the payment to the loan company out of the Net Wages account

Or you could create a separate liability account for the loan and journal to that as part of your month end and make you payment form that account. I think the value in that route would be realised only if, the payment to the loan company was not made at the same time as the staff were paid and so it caused issues with reconciling the Nets Wages account.

[cruiser]

Thanks Bruce, I understand what you are saying but if I may clarify the situation.
The Payroll package I use (not certain if I am allowed to mention the name)monthly summary shows the monthly repayments of the loan from the NET wages as Non Allowed deductions and subsequently if I then add this figure to the NET wages figure from the summary and then input the total figure it DOES 0 out as normal.
Would I be correct therefore in that what I am doing is OK??

[brucedenney]

If it shows it as a "NonAllowed" deduction in the package, then where does that appear in your journal?

You need to either post that "non allowed" deduction to a separate account as part of your journal or add it to the net wages

eg
Db Gross Wages
Db PRSI (Employer)
Cr PRSI (Employer & Employee)
Cr Net Wages
Cr PAYE
Cr Loan deduction J Bloggs to Bank X

[cruiser]

Thanks it is getting clearer now. Each month the bank A/C shows a payment out to the loan account at the bank of the employee of €660. The employees payslip shows his NET pay (which is MINUS the repayment). The Non-allowed portion is this repayment. I then add the non allowed amount (repayment) to the NET pay figure in the journal thereby balancing it.

The problem I seem to be having is what (if any) Nominal A/C I should setup, and where to put the €660 payment each month?

[brucedenney]

Wherever you journal the "Non Allowed" deduction to is where the bank payment goes.

I don't know how you calculate the values on the journal, for the total cost to be correct (Gross Wages) you must be putting the cost of the deduction somewhere in the journal.

[cruiser]

These are the figures I used recently:

DB CR
Db - 7000 Gross Wages 29992.45
Db - 7006 Employers PRSI 2833.29
Cr - 2211 PRSI ER & EE 3580.16
Cr - 2220 Net Wages 26603.49 (This includes The Amount of repayment each month from Employee)(Non Allowable)
Cr - 2210 P.A.Y.E. 2642.09

Totals: 32825.74 32825.74

The employees payslip shows the deductions (including the loan repayment) but I add this back on to the NET pay total as it is a Non allowable deduction and this then balances the Db with the Cr.
In your last reply you mentioned the bank payment being paid into the location where the loan repayment has been placed (which is the net pay) I assume that this would then be the amount that he would normally get in his pay cheque that is being stopped and paid by the company each month then when the cheque payment is placed in 2220 this will then balance the NET pay for the month? Am I correct.

[cruiser]

Hi Bruce,.

Having slept on the solution I now fully understand your explanation and I have now included the additional Journal entry of the Loan repayment (J Bloggs) and then paid the bank payment also to the account and all is now well. Once again thanks for the solution much appreciated.