Accounting Businesses sometimes engage in transactions with their employees. Like all others, however, these transactions should always be `arm`s-length` and should be recorded and reported as any other similar transaction would be. The following paragraphs explain generally accepted accounting principles on the recording of loan transactions.
The treasurer of Wilson Sales Co., Patrick Axle, borrowed $50,000 from the company and placed a note in his desk drawer, promising to repay the loan. However, Patrick did not record the loan on the company`s books, and therefore did not report the loan on the company`s balance sheet. Should Patrick have borrowed the money from Wilson Company? Should the loan be recorded and reported on Wilson company`s balance sheet? If so, in what kind of account should the loan be recorded?
If Patrick Axle is allowed by the company to borrow money then he indeed has a loan transaction with the company. Business transactions are recorded when an arms length transaction has taken place. The transaction that took place here is the $50,00 loan between Patrick Axle and Wilson Company. Thus, the correct thing to do is to record the following entry on the date that Patrick took the money from the company.
And, one of the above journal entries must be added or included in the balance sheet, income statement and statement of cash flows. For, generally accepted accounting principles state that all business transactions shall be recorded. Business transactions start with the arm’s length transactions.
Generally Accepted Accounting Principles are the rules that say when to record business transactions and how to record them. In the above situation, if Patrick Axle is authorized to borrow money, then the JOURNAL entry A will be the proper thing to do. However, if Patrick Axle is not authorized to take the $50,000 from the company, then he is a thief and could be charged in the courts of law to return the money. The journal entry B will be the correct journal entry.
McQuaig D., Bille P., (1997) College Accounting, N.Y., Houghton Mifflin
Larson K., Miller P., (1995) Financial Accounting, Boston, Irwin Press