Loans between two companies

Hi there,

We are new to Solar accounts and have just established a new business (limited company) and have a Trust in existence. These have been set up with two separate business files. The business (Ltd company) will be financed by a loan from the trust. The trust will be loaned money from the bank.

This is a bit mind boggling as to how to record these transactions on each business file. There is a loan in both cases (presumably a liability) but also loan re-payments and interest charges each month in both cases (presumably expenses?). The trust will both owe money and will have money owed to it from the Ltd.

Can you recommend the best way to manage this?

Thank you!!

Posted by Jenna Ansell on Mar 22, 2012 3:23 PM GMT

Hi Jenna,

In case you haven't seen it, here is our help topic on recording loans in Solar Accounts:
http://www.solaraccounts.co.uk/help/how-to-record-a-bank-loan-and-repayments.php

The principal is recorded as a separate transaction:
http://www.solaraccounts.co.uk/help/how-to-record-bank-fees-or-interest-charges.php

Now let's say that in your case the business is loaned £800 from the trust, and the trust is loaned £500 from the bank. Here's how I would record the following transactions:

1. In the trust file, record a General Transaction from the Bank Loans account to the Cheque Account for £500
   2. Also in the trust file, create a new asset account called 'Loan to Business' and record a General Transaction to this account from the Cheque Account for £800
   3. In the business file, create a new liability account called 'Loan from Trust' and record a General Transaction from this account to the Cheque Account for £800

Now let's say the business pays back £100 to the trust, of which £20 is interest, then the trust pays back £60 to the bank, of which £10 is interest. Record the following transactions:
1. In the business file, create a new General Transaction from the Cheque Account to the Loan From Trust account for £80
2. In the business file, create a Money Paid Out transaction from the Cheque Account to the Interest Charges expense account for £20. The VAT rate should be 0%.
3. In the trust file, create a new General Transaction from the Loan To Business account to the Cheque Account for £80
4. In the trust file, create a new income account called 'Interest Income' then create a Money Received transaction from this account to the Cheque Account for £20. The VAT rate should be 0%.
5. In the trust file, create a new General Transaction from the Cheque Account to the Bank Loans account for £50
6. In the trust file, create a new Money Paid Out transaction from the Cheque Account to the Interest Charges expense account for £10. The VAT rate should be 0%.

Please check this with your accountant as he/she may prefer a different approach.

Regards,

Posted by Mark McLaren (Solar Accounts) on Mar 22, 2012 5:26 PM GMT