Prepaid HP Interest

Rec'd a TB today which details Prepaid HP interest and within the TB it has been listed towards the 'bottom' of the list where all the items are a type of creditor ie Directors Loan, Accruals etc.

Am comfortable with the concept of what it actually means but unsure of which area to put it in the Sage nominal code list please - just typing my question has made me think that it should be in 'Long Term Liabs' even though it has a debit bal as there are still 50 months to run on the agreement.

Would be pleased if anyone would concur with my thinking or let me know what I should do!

Many thanks 

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Old Greying Accountant's picture

It is not prepaid interest

Old Greying Acc... | | Permalink

The entry would be dr asset with the cost, cr hp with the amount to be paid (n * r), where r is the monthly repayment and n the number of repayments - the difference is the interest and some like to show this way. Generally I would show gross HP liability in 2310 and HP interest in 2311 and net these off in the liabilities on the Balance Sheet.

You need to write this off monthly or quarterly or annually as you prefer over the term of the agreement by crediting this "prepaid interest" account (2311) and debiting the P&L, 7904 usually.

If you want to be uber accurate you could split the liability into due in one year for current liabilities and due in more than one year for long term liabilities.

If the amount is small, you can just divide the interest by the number of instalments for your monthly write off figure, but more accurately should be done on an actual basis, or more simply the rule of 78 aka the SODs method (Sum Of Digits) which is a close approximation to actual.

Rule of 78 = {X / [(n * n+1)/2]} * i, where X is the repayment number in reverse order, n is the number of repayments and i the total interest.

It comes from the fact that for a 12 month agreement the sum of digits is 78:

i.e 1+2+3+4+5+6+7+8+9+10+11+12 = 78, or

(12x13)/2 = 78

So, in month 1 it would be 12/78 * i, month 2 = 11/78 * i, etc.

It looks convoluted, if you set up a simple spreadsheet it is not hard.

It can get complicated by admin fees etc which are often added to the first and last payments.

The alternative ("short cut") way would just be to dr asset cr HP with the same figure, and do a monthly journal to bring in the interest. I usually use this method as Ithink if more reflective of the actuality, and simpler to apply, or even split the bank payment so the capital goes to 2310 and the interest to 7904. If you are doing a straight line write off you can then just set up a recurring payment for the requisite number of repayments.

In your case, the interest under SODs would be 50/1275, 49/1275 ...

 

 

petersaxton's picture

Get the documentation

petersaxton | | Permalink

I would be surprised to see such an account. Many people get the figures wrong on HP so I would suggest you get the documentation and check the calculations.

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