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Level 1

How do you change the loan principal balance if some other fund/person makes payments toward the principal?

We have a large loan we have been paying down for a while.  The loan principal is accounted for in a liability account and any payments we make toward the principal are from this account so the principal is reduced.

 

-We have a separate capital fund (equity) where we house capital donations.  We need to pay the loan principal with the capital fund.  The way I'm thinking of this (and this may be incorrect.) is that another entity is paying down our principal.

 

My question is how do I update the principal balance in our loan account (liability) to reflect the payment made (by the capital fund) toward the principal?

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Level 15

How do you change the loan principal balance if some other fund/person makes payments toward the principal?

What you need to understand is that Equity is never paying loans. Money pays loans. Money is an Asset. Equity is Net Assets. So, the result of Spending Money changes your Equity value.

 

You Pay from banking. That bank account is your Source of the funds you just paid with. This is The Accounting Formula: Assets = Liability + Equity. When Asset (money in the bank) goes down, Equity goes down. When Debt goes down, Equity goes up. So, paying from Bank against Loan = no change in Equity at all. What you seem to want to do is Rebalance Equity.

 

Capital Donations were Income when you got them; they are deposited to Banking. Then, you would have Rebalanced Equity to show Restricted Funds and Unrestricted Funds. That way, at year end, the closing of Income and Expense, always seen in Equity as Net income, is then considered Retained Earnings on the first date of the new fiscal year. So, each time you get Restricted Income, you are supposed to also rebalance Equity: decreasing Unrestricted Fund Balance or Net Assets or Retained earnings and increasing Capital Reserve Equity, to show the amount is split into Restricted Purposes. And Spending of restricted funds is also going to require a separate Equity Rebalancing entry: Decrease Restricted Equity (which reflects you spent is as promised) and increase Unrestricted or Retained Earnings. That way, equity is unchanged and always In Balance.

 

For right now, then, you have 2 steps:

 

Pay from Checking.

Rebalance Equity. This assumes the Restricted Purposes for Capital Equity is met by servicing the debt, and is not restricted for acquiring new assets, for instance. Example:

 

I have a Long Term bond debt balance. Restricted Revenue that are assessed and collected solely for that bond cannot be used to pay for the electricity. It has to be used only to pay down the bond debt, or it is held as restricted surplus. Then, we can release it to use it for the same purposes that would cause us to need to go into more debt, since avoiding more debt for the same reason of issuing bonds = the same Purpose, as restricted to Assets and Improvements, and not to pay the electric bill.

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Level 1

How do you change the loan principal balance if some other fund/person makes payments toward the principal?

These capital funds were purposed for debt reduction.  No worries there.

 

There are a few things here that I'm affraid might just confuse the issue more.  First, when we (a nonprofit) make a deposit into the bank for a restricted fund (like capital), in Quickbooks it is deposited in the bank account, but under "account detail" is sent to an equity account (i.e. Capital Fund).  It is NOT registered as income as we do not want it showing up on our P&L, we want it on our balance sheet.  I'm thinking, by your reply and mention of income that this might not be correct. I'd appreciate your thoughts on that.

 

Second, (as I mentioned in my other reply, I am not an accountant), I'm having a hard time understanding what you mean by certain things as they pertain to QBO.  When you say "Pay from checking", that would seem to be a given, what matters to my ledger is what kind of account detail I list for that check, right?  I.e. I can write a check to pay an electricity bill which registers on an expense account for energy expenses.  Or, I can write a check to a lender to pay off principal on a debt and that amount I paid then shows up as reduction of principal in my loan account (liability account).  So, when you say "Pay from checking" what should be in"Account Detail" when I write the check ?

 

Also, when you say "Rebalance equity", how should that be done?  The equity in the Capital Fund must decrease, what is the other kind of account it should be balanced with?

 

So, I guess I'm asking, how does your answer look in QBO?

 

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Level 15

How do you change the loan principal balance if some other fund/person makes payments toward the principal?

This is Wrong for the accounting: "First, when we (a nonprofit) make a deposit into the bank for a restricted fund (like capital), in Quickbooks it is deposited in the bank account, but under "account detail" is sent to an equity account (i.e. Capital Fund).  It is NOT registered as income as we do not want it showing up on our P&L, we want it on our balance sheet."

 

That is Wrong. If you submit a capital campaign, you asked people to Give you Money. That is Donation Income, as Restricted. Or, it is Liability, such as, we ask for funds to submit for a Matching grant. If we don't get awarded the grant, we Return the donated Funds. If we get the grant, we also need to create Donation Transactions and apply the prepayment to clear the liability and show it is Ours to keep. That is Income.

 

"I'm thinking, by your reply and mention of income that this might not be correct. I'd appreciate your thoughts on that."

I recommend the book Running QB for Not For Profits, by Kathy Ivens.

 

Equity = it was Already ours, such as an Owner puts personal funds into the business bank to keep the business operating.

 

"Second, (as I mentioned in my other reply, I am not an accountant), I'm having a hard time understanding what you mean by certain things as they pertain to QBO.  When you say "Pay from checking", that would seem to be a given, what matters to my ledger is what kind of account detail I list for that check, right?"

 

You Paid a loan. There is nothing about your capital account that affects this. You Paid a Loan, just like you always Pay a Loan from Checking. You are overthinking this part.

 

"I.e. I can write a check to pay an electricity bill which registers on an expense account for energy expenses.  Or, I can write a check to a lender to pay off principal on a debt and that amount I paid then shows up as reduction of principal in my loan account (liability account).  So, when you say "Pay from checking" what should be in"Account Detail" when I write the check ?"

 

It's the same as every other check you enter to pay that loan.

 

"Also, when you say "Rebalance equity", how should that be done?  The equity in the Capital Fund must decrease, what is the other kind of account it should be balanced with?"

Equity is the other Kind of Account. You have something named, for instance, Unrestricted Net Assets or General Fund Equity or Retained Earnings.

 

"So, I guess I'm asking, how does your answer look in QBO?"

Exactly what I described.

 

Example:

 

You have $5,000 in Checking as General Funds and $5,000 as Capital Reserves. You spend from $1,000 Checking. This Check Expense entry looks no different. Now you get to decide if you also need to show you just used Restricted Funds or not. If so, then Debit Restricted Equity (goes down) and Credit Unrestricted Equity (goes up). Total Equity is not Changed; it is Rebalanced.

 

Then, you get a $5,000 Restricted Grant. This is Restricted Income. You deposit it to Checking. You also need to Rebalance Equity. Restricted Equity gets a Credit (goes up) and Unrestricted Net Assets (fund balance or Retained Earnings) goes Down. Total Equity has Changed, because the Net Income line see in the Bal Sheet reporting shows Net Income just went up, because of the $5,000 Grant Income, which you need to Report as Income.

 

You cannot choose what shows or doesn't show on the P&L. You follow the Requirements. You got Income. Under your accounting requirements, if you have the right to use the funds, or "the resources are available" then it was Income when you got it.

 

That might mean you need to file some amended 990 forms, of course.

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