The bookkeeping behind an asset purchase via a Chattel Mortgage

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 typChattel Mortgage e 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:

  • The GST is claimable at the time of the purchase regardless of whether you account for GST on a cash or accrual basis.
  • The allowable depreciation and interest payments are tax deductible.
  • The full amount of the purchase can be financed including an upfront deposit and/or trade-in.
  • The asset purchased automatically belongs to the buyer and the title is transferred upon final payment.
  • Cash flow is kept under control because the business can borrow the funds rather than spend current savings and can also factor the repayments into its monthly forecast projection.

 

The bookkeeping behind the Chattel Mortgage purchase:

Let’s say your business has purchased a new motor vehicle. The invoice from the vehicle dealer might look something like this:

Motor Vehicle Purchase Invoice

 

The Finance Company schedule could look like this:

Your Finance Company

 

#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):

  • Deposit Paid (Current Asset) – no tax code
  • Motor Vehicles at Cost (Non-Current Asset) – apply capital expense including GST tax code
  • Chattel Mortgage (Motor Vehicle) (Non-Current Liability) – no tax code
  • Chattel Mortgage Interest Charges (Expense) – no tax code
  • Chattel Mortgage Fees & Charges – tax code varies, could be be Free or GST inclusive
  • Motor Vehicle Registration (Expense) – apply GST Free tax code
  • Motor Vehicle Insurance (Expense) – apply GST inclusive tax code
  • Unexpired Term Interest (Non-Current Liability) – no tax code

Now comes the bookkeeping part!

First enter a spend money transaction to record the payment of the deposit:

 

Deposit Paid

Next, enter this journal to record the purchase of the new vehicle:

 

Navara Purchase Journal

 

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! I have used Xero for the examples above but the bookkeeping process applies in general to any software package so don’t be put off by the images. Next week I’ll review asset purchases via a Hire Purchase finance agreement. Until then, happy bookkeeping!

 

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15 thoughts on “The bookkeeping behind an asset purchase via a Chattel Mortgage”

  1. This was extremely helpful – I am using Xero and grappling with both accounting for the vehicle purchased via Chattel as well as the FBT component. I have posted on Xero Community and FlyingSolo without any replies yet.

    Many thanks Louise!

  2. Michelle Chapman

    Why is the chattel mortgage interest – third line – coded as BAS excluded. Shouldn’t it be GST Free Expense?

  3. Thanks Mark. Unfortunately I cannot give advice on individual accounting issues if I do not have a complete understanding of the financials and the background information behind them. You should direct your question to your accountant.

  4. Hi Louise
    Can you pls explain the computation behind $311.31 in the unexpired interest/finance cost- I cannot understand how you have arrived at that number.

    Thanks
    Dean

    1. Hi Dean, there isn’t any real computation behind the $311.31 figure. I used this figure purely as an example of what the loan repayment may look like in terms of the transaction. Hope that helps.

  5. Hello Louise,

    I don’t know what bookkeeping school have told you to record this Chattel this way !!! I have no Idea which accountant created your ‘911 ‘ account (unpaid interest liability ) . This amount is never recorded initially. Please read more about liability recognition definition ‘accounting standards’ (accounting 101) .

    Let me express how it should look the Initial bookkeeping record:

    Stamp duty (capital Motor Veh ) 950

    Rego (expense ) 800

    Insurance ( expense ) 500

    Insurance stamp duty (expense) 45

    Motor Vehicle ( cap asset ) 50 000

    GST receivable 5050

    Bank 5000

    Chattel Mortgage 52345

    Next record when 1st payment is made at 7% assumed interest (generally see the financial contract for the rate )

    Interest expense 301.16 *

    Chattel Mortgage liability 728.10

    Bank 1029.27

    * $52345 x 7% x 30/ 365 This is the way all the other Interests amounts is calculated based on monthly balance ( Chattel Mortgage payable )

    Hope this will assist you more.

    Regards

    Kevin

    1. Well thanks Kevin. I appreciate a different view point and that’s why I’m approving your comment, but not the aggressiveness of the delivery! For all you know I could be having a hard time of it right now (which I am) and waking up to this sort of comment doesn’t help. “Accounting 101”? How about “Manners 101” buddy? Be careful how your writing comes across – it is possible to make yourself heard without being rude.

  6. Hi there

    This was such a well presented wokflow and helped me greatly when purchasing my company vehicle.

    I’m wondering if its possible to provide some guidance now that I’m ready to sell / dispose of the vehicle.

    In the scenario where I’ve paid the loan out early, is it necessary to zero-out / clear the residual “unexpired term interest” amount from the non-current liability account?

    1. Louise McLoughlin

      Thanks Michael. Unfortunately I don’t give out accounting advice via my website posts. You will need to seek advice from your accountant.

  7. Thanks for an awesome explanation, I was wondering how to enter this exact scenario because although the interest is added to the loan up front, it needed to be posted monthly. You have solved my problem with the unexpired term interest a/c. Thanks again!!

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