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Bookkeeping – How to enter a Chattel Mortgage in your accounts books
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Published on Thursday, 11 April 2024 10:10
What is a Chattel Mortgage?
A chattel mortgage is a type of finance loan where the business (borrower) takes ownership of the financed goods (chattel), while the lender holds a 'mortgage' over it until the loan, including any balloon payment, is fully paid off.
Businesses may opt for a balloon payment to either lower regular repayment amounts or structure repayments to cover the entire loan amount over the loan term. A balloon payment is a single lump sum paid to the lender, typically at the end of the loan period. This sum is often a percentage of the total loan and can be subject to negotiation with the lender. Alternatively, loan repayments are spread out over the loan term and encompass both principal and interest.
GST is applicable to the purchase of the goods and, with adjustments for private usage if relevant, whether reporting on a cash or accrual basis for the BAS (Business Activity Statement) at the purchase date. For specific advice on this matter, it is advisable to consult with an accountant.
What is the difference between Chattel Mortgages and Hire Purchase Agreements?
In a chattel mortgage, the purchaser holds title to the goods from the time of purchase until the loan is repaid in full. The borrower secures the purchase price (or a portion of it) through a loan and uses the borrowed funds to settle the supplier for the goods. Legal ownership of the goods is transferred at the time of purchase. Once ownership is transferred, the business can claim depreciation (if applicable) and GST on the goods, as well as the interest expense on the loan.
On the other hand, a hire purchase agreement involves a contract for hiring goods, where the title of the goods remains with the lender and does not transfer to the purchaser until either the option to purchase is exercised or the final installment is made.
This represents the distinction between a chattel mortgage and a hire purchase agreement.
Bookkeeping Setup and Processing
Accounts needed for Chattel Mortgage Process for vehicle purchase -
Plus a Current Asset A/c: ‘Deposits to Suppliers’
Enter the Purchase of the Chattel Mortgage Goods – example a Car
Deposit paid before purchase– Allocated to Current Asset A/c: ‘Deposits to Suppliers’.
Purchase of Car Journal
Making the Repayments
Monthly payments – sample figures
Monthly Payment: $887.43
Number of Payments: 48
Look at the Finance Company schedule, as the first* monthly payment will be recorded like this:
*Note – The first repayment may include the establishment fees, put these to expense account “Finance Costs” as they are usually claimable immediately, so verify with advisor.
Note: If you do not have the breakdown of the interest as per the above example, do not make it up. The accountant will work out the interest and unexpired interest charges at the end of the financial year (EOFY) and include the amounts in the adjustment journal to be processed at EOFY. If you only have the repayment amount (in above example $887.43) simply post the entire amount to the loan account.
Optional
Optional and not necessary, some prefer to show the total value of Interest for the term of the Chattel Mortgage on the Balance Sheet using Unexpired Term Charges to show Interest due later. Additional accounts are required.
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