How to account for loan origination fee?

CultureGap

So I took out a loan for $8400 back in January and set up a liability account for it, and when the $8400 was deposited in my bank, that transaction was categorized as a transfer from that loan liability account.

However, there is a $503 loan fee that is added to the $8400 principal that I also need to pay for. The liability account only accounts for the $8400 principal...how do I account for this $503 in Wave?

Mikeg

@CultureGap,
Loan costs are amortized over the terms of the loan. So if it is a 5 year loan 503/5 would be the annual amount or 503/60 the monthly amount to expense. Wouldn't the deposited amount be 8400-503=7897? Based on that, your entry would have been debit cash 7897 debit loan cost 503 (asset) and credit liability 8400. To amortize the loan cost Debit amortization expense and credit accumulated amortization (contra asset)

CultureGap

Thanks so much for the quick reply, Mike. The lender added $503 to the principal amount that I owe. The starting amount owed on this loan therefore was $8903, of which I received $8400 (which is the amount documented in this liability account in Wave.) So how do I correct it now, to show the actual amount that I still owe?

Mikeg

CultureGap,
You would debit Loan Costs (asset) and credit loan payable. Since you originally recorded the loan at 8400 the balance of the liability would be off from actual balance owed.

CultureGap

Thanks Mike!
So should I create an asset account for Loan Costs in Wave as a Depreciation and Amortization account?

Mikeg

Yes.

CultureGap

Thanks again, Mike! This was so helpful and educational.

Mikeg

Anytime

Sandi

I second that. struggling to account for interest and principle as seperate entities when bank transaction is for a combined figure