4.1.Cash based accounting Scenario:
4.1.1.COA Snippet
| HEAD | Placeholder |
| Assets | Cash Loan Portfolio Transfers in Suspense |
| Income | Interest on loans Income from fees Income from Penalties |
| Expenses | Losses Written Off |
| Liability | Loan Over-payments |
4.1.2.Posting Rules
| Event | Debit | Credit |
| Disbursal | Loan Portfolio | Cash |
| Principal repayment | Cash | Loan Portfolio |
| Interest repayment | Cash | Interest on loans |
| Principal Write off | Losses Written Off | Loan Portfolio |
| Fees payment | Cash | Income from fees |
| Penalty payment | Cash | Income from Penalties |
| Initiate Transfer (From Branch A to Branch B) | Transfers in Suspense | Loan Portfolio |
| Accept Transfer (In Branch B) | Loan Portfolio | Transfers in Suspense |
| Over payment | Cash | Loan Over-payments |
| Refund (of Overpaid amount) | Loan Over-payments | Cash |
4.2 Accrual Based accounting Scenario
Would only involve posting to three new accounts (Receivables “Income Type”).
4.2.1 COA Snippet
| HEAD | Placeholder |
| Assets | Cash Loan Portfolio Receivables Interest Receivables Fees Receivables Penalties |
| Income | Interest on loans Income from fees Income from Penalties |
| Expenses | Losses Written Off |
4.2.2 Posting Rules
| Event | Debit | Credit |
| Disbursal | Loan Portfolio | Cash |
| Interest Applied | Receivables Interest | Interest on loans |
| Fee Applied | Receivables fee | Income from fees |
| Penalty Applied | Receivables penalties | Income from Penalties |
| Principal repayment | Cash | Loan Portfolio |
| Interest repayment | Cash | Receivables Interest |
| Principal Write off | Losses Written Off | Loan Portfolio |
| Fees payment | Cash | Receivables fee |
| Penalty payment | Cash | Receivables penalties |
| Interest write off | Losses Written Off | Receivables Interest |
| Fee write off | Losses Written Off | Receivables fee |
| Penalty write off | Losses Written Off | Receivables penalties |
4.2.3 Examples
4.2.3.1 Flat Interest Type
When Interest Type is flat, prepayment does not write off any interest. The entire interest is recognized and “receivable” as soon as the loan is disbursed.
The entire interest (for complete duration of the loan) is recognized immediately after disbursal.
There are quite a few conflicting views on if this special treatment is required. However, leaving it in here for now till we get feedback from a few accountants.
The sample loan shown here follows a monthly repayment cycle.
| Event | Debit | Credit |
| Disbursal (7-10-2012) | Portfolio Control Account (1) | Fund (1) |
| Disbursal (7-10-2012) | Interest Receivable (2) | Income from interest (2) |
| Apply Fee (7-10-2012) | Fees Receivable(3) | Interest Receivable (4) |
| Principal, Interest and Fee Repayment(1) (7-11-2012) | Fund (4) | Portfolio Control Account (4) Fees Receivable(4) |
| Prepayment for next n-1 Installments (excluding part of last principal) (8-11-2012) | Fund (5) | Interest Receivable (5) Portfolio Control Account(5) |
| Prepayment of remaining Principal (17-11-2012) | Fund (6) | Portfolio Control Account(6) |
4.2.3.1 Declining Interest Type
In the case of Declining Balance, we have loans involving interest recalculation. The interest is accrued at the date of each repayment.
The system needs to have a job for posting the same
| Event | Debit | Credit |
| Disbursal (7-10-2012) | Interest Receivable (2) | Fund (1) |
| Automated System Event (when an Interest repayment becomes due) (7-11-2012) | Interest Receivable (2) | Income from interest (2) |
| Principal, Interest Repayment(1st Installment) (7-11-2012) | Fund (3) | Interest Receivable (3) Portfolio Control Account (3) |
| Prepayment for remaining Installment’s (no interest accrued) (7-11-2012) | Fund (4) | Portfolio Control Account(4) |
for recognizing the same while doing a prepayment.
4.2.4 Month end and year End Closing
We should also have an option for Month end closing and year end closing at a branch level (basically a bulk “apply accrued interest” till date job for all loans of declining Interest type)
This is must for regulatory requirements. We should have the option of turning the same “on” and “off” from the user interface
*This section needs to be revisited in detail