GL Setup Example

Loan Groups can be used to handle the disbursement of funds to the proper General Ledger accounts of Participation Loans. For a complete discussion of the NLS Participation Module, see Participation.

In a participation loan, some portion of the loan has been funded by an entity (called the participating entity) aside from the lender who is servicing the loan (called the lead participant). The participating entity will collect a portion of the interest and principal payments made on the loan. The percentage of payments collected by the participating entity is generally proportional to the percentage of principal that the participating entity funded. Some participation loans use LIFO and FIFO payment options instead of a percentage. LIFO (Last in – First out) means that the participant whose funds were disbursed last is paid off first. FIFO (First in – First out) means that the participant whose funds were disbursed first is paid back first.

Because the lead participant must pay some of the funds collected to the participating entity, the general ledger accounting for the participation is handled differently than for regular loans. This is reflected in the GL setup for the Loan Group of the participating entity.

Below is an example of a GL account setup for a participated, fixed rate, commercial loan. The loan groups involved are 1501 – Commercial Loans – Fixed Rate, and 1504 – Participations sold – commercial loans.

GL Account

1501
Type

1501
Account

1504
Type

1504
Account

Cash Account

Asset

1001

Asset

1011

Loan Asset

Asset

1501

Asset

1504

Interest Income

Revenue

6301

Liability

2804

Accrued Interest

Asset

1931

Asset

1944

Late Fee Income

Revenue

6383

Liability

2804

Accrued Late Fees

Asset

1937

Asset

1944

Other Fees Income

Revenue

6399

Liability

2804

Accrued Other Fees

Asset

1937

Asset

1944

Write-off Accounts

Expense

7601

Expense

7601

Suspense

Liability

2701

Liability

2701


The list of GL accounts involved in the servicing of this loan is:

1001 Currency and coin
1011 Funds held for participating entities
1501 Commercial loans – fixed rate
1504 Participations sold – commercial loans
1931 Accrued interest receivable – commercial loans
1937 Loan fees receivable
1944 Funds receivable on behalf of participating entities
2701 Acceptances outstanding
2804 Funds due to participating entities
6301 Interest income on commercial loans – fixed rate
6383 Late charges
6399 Other charges and fees on loans
7601 Provision for possible loan losses

Next, we continue the example by running through several transactions and seeing how they affect the general ledger.

We begin the example by assuming a $2,000 loan at 12% interest. The loan is 50% participated. At the start, our cash account (1001) holds $1,000, which is to be our portion of the principal of this loan.

Starting Balances:

Account Debit Credit
1001 1,000.00 0.00

Transaction #1: The participating entity gives us $1,000 to lend. We place the money in a separate cash account (1011). We also credit a liability account (2804) to show that we must pay this back to the participating entity. This transaction is done in your general ledger and is outside the scope of NLS (since the loan is not yet funded, and the Nortridge Loan System deals only with the actual servicing of the loan).

Balances:

Account Debit Credit
1001 1,000.00 0.00
1011 1,000.00 0.00
2804 0.00 1,000.00

Transaction #2: We fund the loan as a 50/50 participation for $2,000. On the day that the loan is funded, the GL Posting Report instructs the accounting department to credit $1,000 to the cash account (1001), credit $1,000 to the participant’s cash account (1011), debit $1,000 to the loan asset account (1501), and debit $1,000 to the participant’s loan asset account (1504).

Balances:

Account Debit Credit
1001 0.00 0.00
1011 0.00 0.00
1501 1,000.00 0.00
1504 1,000.00 0.00
2804 0.00 1,000.00

Transaction #3: Over the course of a month, the system accrues interest on the $2,000 principal of $20. Of this $20, $10 is accrued on behalf of the participant and must eventually be paid to that participant. Since the participant’s loan group setup shows the liability account (2804) in the interest income column, the GL posting report will automatically increase the amount owed to the participant. The user need only follow the GL posting report. $10 is debited to the accrued interest receivable account (1931), $10 is credited to the revenue account (6301), $10 is debited to the participant’s accrued interest account (1944), and $10 is credited to the liability account (2804).

Balances:

Account Debit Credit
1001 0.00 0.00
1011 0.00 0.00
1501 1,000.00 0.00
1504 1,000.00 0.00
1931 10.00 0.00
1944 10.00 0.00
2804 0.00 1,010.00
6301 0.00 10.00

Transaction #4: The customer makes a payment of $120. This payment is distributed by the system as $100 to principal, and $20 to interest. On the GL Posting Report, this is further broken down as a $50 principal payment for each participant, and a $10 interest payment. The GL posts are: $60 debit to the cash account (1001), $60 debit to the cash account of the participant (1011), $50 credit to the loan asset (1501), $50 credit to the loan asset of the participant (1504), $10 credit to the accrued interest (1931), and $10 credit to the accrued interest of the participant (1944).

Balances:

Account Debit Credit
1001 60.00 0.00
1011 60.00 0.00
1501 950.00 0.00
1504 950.00 0.00
1931 0.00

0.00

1944 0.00 0.00
2804 0.00 1,010.00
6301 0.00 10.00

Transaction #5: At the end of each month, the lending institution in our example makes a payment to the participating entity of their portion of any loan payments made. To see what needs to be paid, they need only refer to the balance of account 1011. A payment of $60 is made to the participating entity. Like the original transfer of funds from the participating entity, this payment is not handled within NLS. An entry for the transaction is made in the general ledger: $60 debit to the liability account of funds owed to the participating entity (2804), and a $60 credit to the participating entity’s cash account (1011).

Final Balances:

Account Debit Credit
1001 60.00 0.00
1011 0.00 0.00
1501 950.00 0.00
1504 950.00 0.00
1931 0.00 0.00
1944 0.00 0.00
2804 0.00 950.00
6301 0.00 10.00