Vehicle Financing Purchase

by Lussoli
(Mississauga)

Bookkeeping Entries For Vehicle Purchase and Loan Payments

I bought a car and need to make the entry, looks simple eh!

Well it costs $19K plus $2K interest to finance it in 60 months.

If I debit the total amount of the Interest in the P/L my A/P looks perfect ... but my Expense Account of Bank Charges and interest won't reflect the reality since it'll be paid in 6 years ... so I shouldn't post the total amount of interest this year, should I ?

If not how do I post the interest?

Thanks.

Hi Lussoli,

Take a read through my chat on Vehicle Purchases. Towards the end of the chat, you find a link on how to record your bookkeeping entries for the purchase of a vehicle.

In my chat on the balance sheet, you'll find the bookkeeping entries you need to record the ongoing loan payments.

If there is anything you don't understand after looking at those chats and following the links, then post back here ... please. :0)

P.S. I would like to remind you there is a difference between information and advice. The general information provided in this post or on my site should not be construed as advice. You should not act or rely on this information without engaging professional advice specific to your situation prior to using this site content for any reason whatsoever.

Comments for Vehicle Financing Purchase

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Mar 16, 2011

Vehicle Financing Purchase
by: Lussoli

Hi Laura, I'm still short for the complete answer to my question.

I was thinking of making the entry like this:

D - Vehicle (Asset) 16,814
D - HST (Liability) 2,186
D - Bank Charg/Interest 2,000
C - Acc Payablle (Liability) 21,000

My point of view here is that the $2K Interest is not correct, is it?

My A/P is fine since I'm really owing that amount and I can post the loan pymt every month and at the end the result will be zero but how about taking the debit of all interest in this year if it will be paid in 5 years? is that correct or my posting should be different?

Many thanks.

Lussoli

image of fancy scroll lines

Hi Lussoli,

You've lost me. Why do you want to book your interest before your pay it? Did you purchase the vehicle and get a loan to finance the purchase ... or are you leasing the vehicle?

Mar 16, 2011

What I would do
by: Sarah

Hi Lussoli

You indicate a loan payment, so if you got a loan to pay the vehicle, the following is what you could do:-

D - Vehicle (Asset) 16,814
D - HST (Liability) 2,186
C - Acc Payable (Liability)name of vendor 19,000

This shows you have purchased an asset on your balance sheet, and your claim of HST.

Then

D - Accounts Payable(Liability)name of vendor 19,000
C - Name of loan providor (Liability) 19,000

This now shows on your balance sheet that you have a loan to pay off.

Then, when you make a monthly payment (I will pretend it's $100 for payment and $50 for interest because I don't know what your monthly repayments are):-

D - Liability [name of loan provider] 100
D - Bank Charge/Interest 50
C - Bank/cash 150

This will reduce the loan on the balance sheet ev every month, and show the interest portion.

Your loan provider should be able to supply you with a monthly payments schedule showing the interest portion for each month.

Hope this helps.

Mar 16, 2011

Excellent Answer
by: Lake

Terrific answer Sarah!

The only thing Lussoli now needs to worry about is if he is eligible to claim 100% of the input tax credits for his vehicle.

There are special rules for claiming ITCs for vehicles.

IF he used his personal vehicle for business use less than 90% of the time, (he needs an auto log to support his use), he is NOT eligible to claim 100% of the ITCs.

Lussoli hasn't given us enough information to know in his situation.

Mar 16, 2011

Vehicle Financed
by: Lussoli

Let me try to be clearer.

If you buy a car and the invoice comes showing the total amount of $21,000 how can you post only $19,000 ?

In my point of view you have to "enter" the total amount of the invoice and not part of that. Besides the amount owing should be there in the balance sheet and in this case I'm owing $21K, so my question is how to enter this invoice (or in my case where I don't understand: the amount for the interest because it does not seem fair to debit the total amount of interest at once since it'll be paid in 60 months).

Hope I'm crystal clear now.

Many thanks

Mar 16, 2011

You Need To Stop and Do Some Reading
by: Lake

Lussoli,

It sounds to me like you are leasing the car if "they" are pre-billing you for interest ... or are you may have 2 different sets of paperwork ... one for the purchase and one for the loan. If you have 2 different sets of paperwork, then "they" may just be informing you as a consumer what the total expense will be over the life of the loan.

Please read Capital vs. Operating Lease to learn why the distinction is important and how each type of lease is handled differently from a vehicle purchase that is financed.

If this is an operating lease, you do not own the vehicle unless you purchase it at the end of the lease. If this is your situation, you do NOT book an entry now but book a monthly expense entry over 60 months.

You also haven't said if you are using this vehicle 90% or more for business ... and whether you are incorporated or not .... and who is "purchasing" it ... you or the business. Again it makes a difference on how the entry is booked. Take a minute to read How to Claim Input Tax Credits Relating to Business Use of Your Personal Vehicle.

If you are not eligible to claim 100% of your vehicle's GST/HST, you include the tax as part of the cost, which means you debit $2186 to the account "Vehicle" when booking the initial purchase.

I think you need to speak with your accountant. S/he will know your circumstances and be able to assist you in booking your entry properly. Without seeing your paperwork, I can't help you any further. Sorry.

P.S. I would like to remind you there is a difference between information and advice. The general information provided in this post or on my site should not be construed as advice. You should not act or rely on this information without engaging professional advice specific to your situation prior to using this site content for any reason whatsoever.

Mar 17, 2011

Financed Vehicle Purchase
by: Lussoli

Yeah maybe I am so wrong that I'm not seeing it right.

The car was purchased. There is no lease at all. They charge interest for financing the car.

I have a small corporation.

This car is used 100% for my business (it is a Van if this is also important).

I do the bookkeeping and take my F/S at YE to my Accountant who's a pain...

I was just trying to get some help to avoid getting *8$# from that king.

Good bye

Mar 17, 2011

You Know What You Know
by: Lake

Lussoli,

Benjamin Disraeli was a British Prime Minister. I believe one of his memorable sayings was, "To be conscious that you are ignorant of the facts is a great step to knowledge."

As you can see, this is not a simple or basic bookkeeping entry you are trying to record.

Sarah graciously gave you your entries. The interest portion of your "invoice" does not get booked initially. As Sarah showed you, it will be expensed slowly over 60 months.

Surely your accountant wouldn't get upset with you if you contacted him during the year with help on how to book a complicated entry correctly for your situation.

If he gets after you, it's probably because some of your entries make his job harder ... and could be costing you more money as he has to "fix" them ... just guessing.

I hope you have a good weekend with your family and/or friends.

Jan 31, 2016

HST Paid on Long Term Debt of Vehicle Purchase
by: Jo Ellen, Ontario

I'm trying to record the HST paid for a month time period on a vehicle purchase (in Ontario) when the vehicle has been financed.

The initial HST total has been recorded but how do I balance a monthly payment for remittance/claiming purposes without recording it twice?

Jan 31, 2016

Jo Ellen
by: Lake

Claiming HST paid for the purchase of a vehicle is complex.

Check out the bookkeeping entries for the purchase and financing of a vehicle.

There are special rules on how to claim your input tax credits related to a vehicle purchase.

The HST is not normally related to the debt/financing of vehicle but rather the purchase of the vehicle.

But I'm wondering if you have an operating or capitalized lease as you as you refer to HST and debt together.

The entry pertaining to the payment of a lease each month is:

Debit Interest expense - from your amortization schedule (income statement)

Debit Lease liability - principal payment (balance sheet)

Debit GST payable - do not record this if GST was accounted for at the onset of the lease (balance sheet)

Credit Cash in Bank (current asset on balance sheet)

For an operating lease the monthly payment is recorded as follows:

Debit Lease expense including PST (income statement)

Debit GST payable (balance sheet)

Credit Cash in Bank (current asset on balance sheet)

You may need to account for other items / issues such as extras included in the payment, if you made a down payment, and if you exercise the buyout option.

If you have an accountant, I'd run your question by him/her due to the complexity of rules around vehicle purchases and leases.

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