Paying a bill using Finance Funding

The following question was asked via MYOB Communities: How do i use finance funding to pay for my business insurance?

Hi, Our Insurance broker invoiced us for our Annual Workers Compensation and Business Insurance, which invoices have been entered into ‘Purchases’. We entered into a finance funding agreement where the funder will pay the invoices out and we will repay the funder with 10 installments over the year, including an application fee and interest. How do I pay out the invoices from our Insurance Broker to show the premiums have been paid with the money lent through financing – the financed money didn’t come into our bank accounts at all – it was paid directly from the funder to our insurance broker. There then needs to be that account where I can enter the installments as we pay them to pay-off the loan? – Casie Hi Cassie, Simply create a new Credit Card Account in MYOB and call it Financier Loan, when paying the Insurance bills chose this Credit Card Account to create the Liability (money owed) and when the repayments come out of your Bank Account to repay the loan allocate against the Credit Card Account. Hope this helps.

This type of transaction is very common to most businesses as they will be invoiced upfront for their business insurance but will pay it off monthly using a Finance Funding Loan from their respective financier. To fully account for this transaction we need to account for a number of different transactions:

The Setup

    1. Capitalise the Insurance Expense. This is done by creating an Asset Account called “Prepaid Business Insurance”

Asset Account for Prepaid Insurance Expense

  1. Account for the Liability. Create a Credit Card Account in MYOB called “Loan A/c for Insurance Funding”.

The Transactions

    1. Firstly record the purchase of the Insurance from the Insurance Company which is done against the Asset Account created earlier.

Prepaid Insurance

    1. Record the payment of this purchase against the Credit Card Account.

Payment of Prepaid Insurance

    1. Record the payment via Direct Debit out of your Bank A/c against the Credit Card Account
    2. Journal the Asset Account reducing its balance and allocating to the Insurance Expense Account

GJ Recording Insurance Expense

The Images Used


 
About Benn Franzmann

I am a qualified Accountant specializing in the setup and training of various forms of accounting software. I work for a number of different clients and also facilitate MYOB training at Melbourne CAE

Comments

  1. Casie Delaney says:

    Thanks Ben, that makes sense.

    I’ve paid the bills and the credit card account (reflecting the loan) now reflects the amount funded, however, the orginal expence accounts don’t revert to $0 as they should?

    • Hi Cassie,

      Here is a link to the long answer Prepaid Expense. Short answer is if your company turns over less than 2 mil and the prepaid expense pertains wholly to the same financial year then you can simply expense it out in one go. If the expense spans financial years then you will have to change the original purchase from the allocated expense account to an asset account eg 1-xxxx Prepaid Insurance and to reflect the actual expense for the month/year on the P&L you will have to record a journal entry that credits (reduce) the 1-xxxx account and debits (increase) the 6-xxxx account. Hope that helps. By the way you were my first post on my blog so feel free to to leave some comments about what you reckon about my website.

      Cheers Benn

      • Karen Reid. says:

        Benn,

        I have followed all of your instructions above, spanning a financial year. My general journal appears on the right date, but when I have gone to do a bank reconcile, there is no debit to match the monthly amount taken out by the financier.

        Regards, Karen Reid.

        • Hi Karen,

          The GJ records the monthly expense(6-1300) amount and the amortisation of the prepayment(1-3000). When the money comes out of you bank account to repay the Financier you should so a spend money transaction and use as the allocation account 2-1400. Its mentioned here:

        • Record the payment via Direct Debit out of your Bank A/c against the Credit Card Account.
        • Hope that helps.

  • Hi Benn, Is this example applies to both businesses on cash and accrual basis?
    thanks
    Karl

    • No it only applies to businesses on a “Cash” basis:
      “When we say ‘small business’ we mean ‘small business entity’, which is an individual, partnership, trust or company with aggregated turnover less than $2 million.”
      If your turnover is greater than 2 mill you would have to capitilise the expense. Check out the following article from the ATO.

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