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 |
1501 |
1504 |
1504 |
|---|---|---|---|---|
|
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 |
