User Guide: Additional Features > Special Accounting Considerations > Rule of 78s Actuarial Interest Accounting > Accrual Basis Accounting
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Accrual Basis Accounting

When a Rule of 78 loan is set for Actuarial Accounting, extra transactions are created for controlling the posting of the interest to the General Ledger.

This example, which uses the figures from the previous example, will go through each of the transactions that occurs and show how they affect the ledger, as well as any changes that are required to the setup in order to facilitate the use of this method.

First, when a loan of this type is added to the system, in addition to the Principal Advance transaction, a transaction will be automatically posted to realize the amount of the pre-computed interest up-front . In our example loan, the two transactions are as follows:

Transaction Code Transaction Description Transaction Amount Debit Account Credit Account
100 Principal Advance 10,000 Loan Asset1 Cash Account1
110 Pre-computed Interest 2,748.19 Loan Asset1 Accrued Deferred Interest1

The Ledger balances associated with this loan, after these transactions are as follows:

General Ledger Account Debit Balance Credit Balance
Loan Asset1 12,748.19
Cash Account1 10,000
Accrued Deferred Interest1 2,748.19

On a daily basis, interest accrues. Two accrual entries are made each day: the Rule of 78 interest and the Actuarial Interest. The entries are posted to the Ledger in the following manner:

Accrual Type Accrual Amount Debit Account Credit Account
Rule of 78 Accrual 3.00348 Accrued Deferred Interest1 Deferred Interest Income1
Actuarial Accrual 2.77778 Deferred Interest Income1 Interest Income1

After 30 days of accruals, the balances of the Ledger Accounts are as follows:

General Ledger Account Debit Balance Credit Balance
Loan Asset1 12,748.19
Cash Account1 10,000
Accrued Deferred Interest1 2,658.08560
Deferred Interest Income1 6.77100
Interest Income1 83.33340

Now the interest balance of $90.10 is paid. In addition to the standard interest payment transaction, a transaction will be automatically run by the system (TC 214) for the payment (on the Ledger) of the Actuarial Interest. By default, this transaction code is set with no General Ledger entries. If you are using this kind of accounting, you should set this transaction to debit the Accrued Interest1 (to offset the credit of the interest payment) and to credit Loan Asset1. If you configure the transaction code in this way, the interest payment transactions will look like this:

Transaction Code Transaction Description Transaction Amount Debit Account Credit Account
202 Interest Payment 90.10 Cash Account1 Accrued Interest1
214 Rule of 78 Actuarial Payment 83.33 Accrued Interest1 Loan Asset1

The final Ledger balances after the interest payment are as follows:

Note

A Principal payment would have been made at the same time but is not relevant to this discussion.
General Ledger Account Debit Balance Credit Balance
Loan Asset1 12,664.86
Cash Account1 9,909.90
Accrued Deferred Interest1 2,658.08560
Deferred Interest Income1 6.77100
Interest Income1 83.33340
Accrued Interest1 6.77100

The balance in Deferred Interest Income1 represents the difference between the interest that has been accrued and the interest that has been applied to the ledger as Income.

The balance in Accrued Interest1 represents the difference between the interest that has been paid and the interest payment that has been applied against the Loan Asset. These balances will generally coincide. They will build to a maximum by approximately the midpoint of the loan and will then decrease. They will be zero (i.e. the interest accrued and taken as income will be equal, and the Interest paid and applied to the asset will be equal) by the final payment of the loan upon maturity. If the loan is paid off early, settlement transactions will post the additional interest to the income and charge the credit balance in Accrued Interest against the asset.



Updated: 2017.10.17


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