answers on the query: I just paid off a bank loan early
Use a General Journal Entry to: If Loan Liability balance is a credit balance - debit loan liability and credit loan interest expense. If Loan Liability is a debit balance then reverse the entry.
Call up your accountant. If the liability already reflected the interest then how was this originally entered? Is there some sort of contra or prepaid interest account set up on the books?
When you set up the original entry, you credited a long term liability, but what account did you debit? Let me give you the general scenario, and that should tell you what entry you need to make now. When you first borrowed the money, you should have debited cash and credited loan payable, for the principal amount of the loan. Each time you made a payment, you should have credited cash for the amount of the payment, and debited interest expense for the interest portion of the payment, and debited loan payable for the principal portion of the payment. Had you done it that way, your ledger would always show the correct 'loan payable' balance. If you paid off the loan at any point, you would write a check for the balance shown in your ledger and end up with a zero balance.
That brings me back to the original question...what account did you debit when you set up this loan at an amount equal to the total payments (both interest and principal) that you would have paid had you mot paid off early? You can probably figure out what to do based upon what I have told you already, but if not, give me the original entry and I will gladly provide the answer.
I just paid off a bank loan early
I wrote a check the same as I did every month for my regular payments, only this time it was for the full amount remaining. However, this was not the full amount listed under the Long Term Liability for the bank note. There is still a sizable chunk left over (expected interest payment that I won't be making). What is the best way to clear the liability acount of the balance?
I once read a book called "Equity Sharing"
I once read a book called "Equity Sharing" (by Georgia Anderson and Sandra Lamb;1986) which contained some interesting ideas. Basically, the concept was that many people who want to buy a house don't have a down payment. Meanwhile, there are people like you who do have the down payment, and who would like to invest in real estate, but don't necessarily want to be a landlord, etc.
According to the book, a deal might work like this. You and your friend buy the house together. You are both on the deed and on the mortgage. You each own 50% interest in the property. You agree that you will be the "Investor" and she will be the "Resident Homebuyer".
You put up the down payment. She puts up nothing. You both buy the house together and she lives in the house and she pays the mortgage payments , taxes, utilities, routine maintenance expenses, etc. In effect, while you both own the whole property, she lives in the whole property and half of the mortgage payment that she pays is for buying her half of the property.
The other half of the mortgage payment, etc. that she pays is to rent your half of the property from you. When the property is sold, you split the profit or losses from the sale.
I thought it was an interesting concept, but I know it can involve a ton of potential legal problems.
