Loan Processing Fee Accounting Entry in Tally

When dealing with loan transactions in Tally, accounting for loan processing fees is crucial for proper financial reporting. Loan processing fees are typically charges imposed by financial institutions to cover the costs associated with the processing of a loan. Properly accounting for these fees in Tally ensures transparency in the company's financial statements and helps maintain compliance with accounting standards. This article will provide a detailed guide on how to record loan processing fees in Tally, including step-by-step instructions and examples.

Understanding Loan Processing Fees

A loan processing fee is typically a one-time charge that banks or lending institutions levy to process loan applications. It is calculated as a percentage of the loan amount or a flat fee. Since loan processing fees are not refundable, they need to be treated as an expense in accounting.

How to Record Loan Processing Fees in Tally

In Tally, accounting entries are crucial for recording business transactions. To record loan processing fees, follow these steps:

Step 1: Creating Ledgers

1. Create a Bank Loan Ledger

   • Go to Gateway of Tally > Accounts Info > Ledgers > Create.
   • Name the ledger as “Bank Loan Account” or any specific loan name.
   • Under the group, select “Loans (Liability).”
   • Set the type as “Current Liabilities” or “Secured Loan,” depending on the loan type.

2. Create an Expense Ledger for Loan Processing Fees

   • Go to Gateway of Tally > Accounts Info > Ledgers > Create.
   • Name the ledger as “Loan Processing Fees.”
   • Under the group, select “Indirect Expenses.”
   • This will ensure that the processing fee is recorded as an expense in the profit and loss statement.

Step 2: Passing Accounting Entries

Once the ledgers are created, record the loan and its associated processing fee. The following are the necessary accounting entries:

1. Recording the Loan
   When the loan is received, record the entry as follows:

   • Bank Account Dr. (With the loan amount minus the processing fee)
   • Loan Account Cr. (With the loan amount)

   This entry will record the loan in the company’s accounts.

2. Recording the Loan Processing Fee
   After processing the loan, record the fee charged by the bank. Here's how you should pass this entry:

   • Loan Processing Fees Account Dr. (With the processing fee amount)
   • Bank Account Cr. (With the fee amount deducted from the bank)

Example

Let's assume a company has taken a loan of $100,000, and the bank charges a 2% processing fee.

• Loan Amount: $100,000
• Processing Fee: 2% of $100,000 = $2,000

Step-by-step entries:

1. Entry for Loan Received

   • Bank Account Dr. $98,000
   • Loan Account Cr. $100,000

2. Entry for Processing Fee

   • Loan Processing Fees Dr. $2,000
   • Bank Account Cr. $2,000

This entry shows that $98,000 was deposited in the company’s bank account (loan amount minus the processing fee), and $2,000 is recorded as an expense in the profit and loss account.

Tax Implications of Loan Processing Fees

Loan processing fees can be subject to Goods and Services Tax (GST) or other applicable taxes, depending on the jurisdiction. If GST is applicable, the entry in Tally would also include tax amounts. Here’s how you can account for it:

Entry with GST on Processing Fees

Assuming a GST rate of 18%, the loan processing fee of $2,000 would attract $360 GST.

Entry for GST on Processing Fees

• Loan Processing Fees Dr. $2,000
• Input GST Dr. $360
• Bank Account Cr. $2,360

This entry ensures that the GST amount is recorded correctly for future tax filings.

Adjusting the Loan Processing Fee as a Deferred Cost

In certain cases, the loan processing fee may be capitalized or treated as a deferred cost, especially if the loan has a long-term tenure. To handle this scenario in Tally, the processing fee is transferred to an asset account and amortized over the life of the loan.

Steps to Account for Deferred Loan Processing Fee

1. Create a Deferred Expense Ledger
   • Go to Gateway of Tally > Accounts Info > Ledgers > Create.
   • Name the ledger as “Deferred Loan Processing Fees.”
   • Group it under “Assets.”
2. Pass the Entry for Amortization
   If the loan is for 5 years, divide the processing fee equally over the years. For example, amortize $2,000 over 5 years.

Yearly Amortization Entry

• Deferred Loan Processing Fees Dr. $400
• Loan Processing Fees Cr. $400

This process ensures that the expense is spread over the loan period, reflecting a more accurate financial picture.

Monitoring and Reporting

Once the loan and processing fee are recorded, it’s important to monitor the loan repayments and ensure that the processing fee is accurately reflected in financial reports. Tally allows for detailed reports such as:

1. Profit and Loss Report
   Shows the processing fee recorded as an indirect expense.

2. Loan Ledger Report
   Displays the status of the loan account and repayments.

By tracking these reports, companies can ensure that their financial records remain accurate and up-to-date.

Conclusion

Accounting for loan processing fees in Tally is an essential task for businesses that rely on loans for financing. Whether the fee is treated as an expense or deferred cost, Tally provides a structured method to ensure accurate financial reporting. By following the steps above, you can ensure that all loan transactions, including processing fees, are recorded efficiently, giving you a clear picture of your financial health.