Client Loans

[CChrest]

I have a client who purchases Home Mortgage Loans.  He himself has Loans he used used to purchase these Loans.  The interest rate charged the clients is higher than the interest rate he pays for purchase of these loans.  This Business has been going on for awhile as a partnership and it was dissolved.  

My problem is when i picked up the account.   The Customer's Loan balance is higher than the Loan balance of my client.  Of course because of the larger principal payment for my client.

Question:

Where do I post the Difference between the balances?

I  post the Customer's Loan Balance to Accounts Receivable, where I apply the principal paid each month.

I the Client's Loan Balance to Accounts Payable, where I apply the Principal Paid each month.

[qbteachmt]

I think you might be lost on the internet. You posted in a "User Community forum Basics" for a Professional Tax Preparer's group that uses Intuit's professional tax preparation programs. It doesn't seem you are using any of these programs, because you made no selection as to which program you are using.

I can give you some basic guidelines: the customer balances have nothing to do with your client's loan balance. You track and manage every loan individually, not relative to the other perspective. Second, Loans are neither AR nor AP. The Customer Loans payable to your client are a different asset. AR is a revolving short-term concept, that money is owed due to sales or delivery of goods and services. Lending to customers is a Long Term type of operation of Assets. The debt owed by your client is not AP. AP is debt owed for delivery of goods and services, not for debt balances owed from borrowing, and typically owed with interest. Debt owed is a different type of Liability, as long term.

I would never expect the Customer Balance total to match your Client's Balance total, except perhaps by coincidence. What you need to do is manage, reconcile and confirm each loan is being tracked properly, interest and fees are being tracked properly, etc.

[CChrest]

I agree , The AR should be an Asset.  I can easily rectify that.

These are home mortgage loans.  

My client had purchased the loans, and at the time the Asset Loans (Home Mortgages) and the Client Liability Loans (used to purchase the Asset Loans) were the same.  The debits and credits equaled. and were in a partnership. Which i did not do the accounts for. The partnership dissolved, and the partners divided out the Asset & Liability Loans.  

So when I received them.   The Asset Loan balances were greater than the Client Liability loans, due to the different interest rates.   So posting the Loan Balances I do not equal out.  I need to put the difference somewhere.   As the difference has to do with the past partnership, i'm thinking I would put the difference in an  account , other, and not include in business income or expense. 

Thank you  

[qbteachmt]

No, this does not matter: "The Asset Loan balances were greater than the Client Liability loans, due to the different interest rates"

The interest, and not the Rate, is only important if you have a loan where that interest is accruing, as when there is unpaid interest owed and you add that to the principal in reality.

Otherwise, the Interest that is not yet owed is not part of the bookkeeping. Example:

The client borrows $100,000 at 3% to loan to a customer at 5%. You simply have $100,000 Asset against the $100,000 liability. Interest is not part of that info and the Rate certainly isn't part of anything but the note paperwork that people are signing.

As the customer makes their payment, the interest is Income to your client. As your client makes their own payment on the borrowed funds, that also is Interest as expense. Both scenarios, in this example, would have them making the exact same principal amount to pay off the loans at exactly the same time.

Now that we've seen how Rate has nothing to do with anything, and how Interest has nothing to do with anything, let's examine how Unpaid Interest might affect this.

Your client has a customer not making a payment for 2 months, so your client accrues the unpaid interest into the principal of the loan balance owed to your client.

And that means they have accrued the interest as income, just unpaid. Now the Principal owed to your client no longer matches the principal your client owes to their own lender. That's fine. That's reality and that is managing each loan separately.

One more scenario:

Let's pretend your client's customer makes an additional $10,000 payment against their principal. Your client is in the middle of closing another deal, and so does not apply this to their own debt balance, but uses it elsewhere. Now your client's principal on that one loan and their customer's balance do not agree. And if your client used the funds for any other reason, such as acquiring something instead of lending or it is sitting as funds in the bank, that is fine. And their two perspectives never match, and that is fine.

The difference is your client's Equity. Not adding to any asset or debt balance. You manage assets and debt balances according to their individual state and activity, and not relative to each other. Example:

You borrow $10,000 to buy a $12,000 piece of equipment. Now the Asset doesn't balance to the Liability. The difference is your Equity. Equity = Net Assets.

AR is the current portion owed to your client, which is principal and interest and might include some sort of fee or penalty. If you remove AR from the perspective, then all loan balances should reconcile each to their own note payable schedule.