Sunday, November 20, 2011

How to post a car purchase in PCLaw

I received the following enquiry from John:
“I purchased an automobile. I have not purchased a car since I installed  PCLaw, and I want to make sure that the assets and liabilities are posted correctly. I cannot simply use  the GL adjustment feature since the amount to be posted for the loan will be more than the amount posted for the purchase of the asset. It is financed for 100% of the purchase price, less the automobile taken in trade, through the dealer’s bank.  The conditional sales contract includes the cost of financing (total interest payable over the term of the loan).”
“Can you advise either as to how to most appropriately post my purchase and loan so as to reflect my intentions, or advise as to a more appropriate manner in which to post them?”
My reply was:
“The simplest way is to create asset and loan accounts that balance. You will have to adjust your capital for the trade-in, if not already listed as an asset.”
“Pay down the loan account throughout the year. The loan balance will decrease faster than it should, because you are including the interest in the payment.”
“At year-end, debit the interest account and increase the loan (returning the excess taken out) by crediting the loan account.”
This simple method has the advantage of allowing you to use the Recurring Entry feature in PCLaw. There are many alternatives, including setting up the loan as an accounts payable, accounting for interest and principle on each payment, or posting interest and depreciation as a capital investment at year-end, to name but a few.

As always, I invite your comments and suggestions for future post topics. Next week – Why I prefer PCLaw.