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Converting Sales Debtor to ST or LT Debt

Implications of converting a sales debtor into a business loan?

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I have a UK client who has a relationship with another UK company that lets properties to businesses in Italy. My client invoices the other company for Services, which can be large chunks of money (£20k+). He didn’t receive payment for his 1st invoice to the other company, but has done for subsequent invoices; he now wants to turn the first invoice into a loan – I’ve asked for a loan agreement to make sure this is kosher. Are there implications for converting the Debtor into a loan on the Balance Sheet that I should be concerned about? Basic bookkeeping entries? Dr ST or LT Loan/Cr Sales? I’m planning to remind the client that converting to a loan doesn't change his liability for corporation tax (no VAT because he wasn’t registered for VAT (or required to be registered) at that time) on the revenue.

Thanks in advance for your help

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By johngroganjga
15th Oct 2021 12:01

You don’t credit sales! You credit the trade debtor being converted to a loan.

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Replying to johngroganjga:
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By cgeens
15th Oct 2021 15:08

Thanks for your message John. I wasn't clear in my message: I meant the end result in the books would be Dr Loan/Cr Sales, not the correcting entry. It's currently Dr Debtors/Cr Sales, so the correction would of course be Cr Debtors/Dr Loan if I processed this. But thanks for your input

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By paul.benny
15th Oct 2021 12:24

Is this loan actually going to earn interest/be repaid? Or is this really a bad debt?

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Replying to paul.benny:
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By cgeens
15th Oct 2021 15:11

Thanks for your response Paul. I don't think it is a bad debt - the client believes that his debtor will pay, but they have agreed to treat this initial first invoice as a loan. All subsequent invoices have been paid. There has been no mention of an interest-bearing loan, but as mentioned, I will be asking for the loan agreement or some evidence of a loan. I just wondered if there were any implications in changing the treatment of this from a Trade Debtor to a ST or LT loan

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Replying to cgeens:
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By Paul Crowley
15th Oct 2021 15:31

Finally figured it out
ST Short term
LT Long term

I much sound like one of those Judges that expects people to tell me who the Beatles are

https://www.accountingweb.co.uk/any-answers/aram

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By Paul Crowley
15th Oct 2021 12:31

Best ignored and left as debtor
What is in it for the reluctant lender

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paddle steamer
By DJKL
16th Oct 2021 00:01

One has no way of knowing from the information given but is there any risk the current debtor company having such a loan on its balance sheet rather than a trade debtor might make its shares be considered as non trading re future BADR and could there also be a BPR issue re the company's shares from such a route?

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