it is very common for businesses to purchase major assets such as motor vehicles via a loan. They can use a commercial bank loan but often finance is “purchased” by way of either Hire Purchase or a Chattel Mortgage. In this week’s blog we will look at a purchase via Chattel Mortgage agreement and how to post it to the accounts.
A Chattel Mortgage is a type of loan typically used to purchase motor vehicles or other major business equipment. It is called a “mortgage” because the financier retains the title of the item purchased until the final payment is received. There are several financial benefits of a Chattel Mortgage including:
Let’s say your business has purchased a new motor vehicle. The invoice from the vehicle dealer might look something like this:
The Finance Company schedule could look like this:
#Bookkeeping tip: if you want to accurately work out the repayments required by a finance company including the premium and the interest component, go to this amortisation calculator. I’ve been using it for years and I swear by it!
Okay so now you have to set up some accounts. Set up the following accounts (if not already created):
Now comes the bookkeeping part!
First enter a spend money transaction to record the payment of the deposit:
Next, enter this journal to record the purchase of the new vehicle:
When it comes time to make a repayment to the finance company, enter a spend money transaction like this:
That’s all there is to it! The above examples used Xero but the bookkeeping process applies in general to any software package so don’t be put off by the images.