In some cases, you may purchase an asset by making a down payment and then financing the balance of the cost.
For this scenario, you'll need two separate entries in your forecast:
- An Asset entry representing the full value of the item you're purchasing with the loan
- A Loan entry representing the financed amount
Entry One: Asset purchase with a down payment
In this example, we're representing the purchase of a delivery vehicle. We made a $10,000 down payment upon purchasing the vehicle, and then we're using a loan to finance the balance due of $47,500. The first step then is to enter the asset purchase into your forecast:
- In the Forecast Overview, click Assets:
- Click the Add Asset button:
- Enter a name for the asset (or a short description):
- For example, choosing One-time amount as the asset type is common. Then, enter the full amount of the asset purchase and the month the purchase takes place. Make these choices based on the full value of the asset, not based on any individual payments. If you need help with asset entries, read Entering assets.
- Choose the type of asset (Long-term or Current), set the useful life of the asset, and select whether or not you plan to resell the asset:
- Click Create & Exit to save the entry. This creates the entry for the Delivery van, which now appears in the Assets chart in your forecast.
When you purchase an asset and include it in your financial forecast, the transaction impacts your balance sheet by reducing the amount of cash, a component of Current Assets. Specifically, the cash used for the purchase decreases the Cash line item and increases another line item within the assets section. If the asset purchased is a Current Asset (meaning it is expected to be converted into cash, sold, or consumed within a year), the asset's value is added to the Other Current Assets line.
Conversely, if the asset is a Long-Term Asset, the cash paid is recorded in the Long-Term Assets section. This reflects the shift of value from liquid cash to an asset expected to benefit the business over a longer period.
Entry Two: Financing for an asset purchase with a down payment
You can enter the financing terms now that the asset purchase has been entered.
- From the Forecast Overview, click Financing
- Click Add New and select Loan from the list:
- Enter the name of this loan, and select the month when you received it:
- Now enter the amount of the loan. Note that the loan amount is less than the full value of the asset - in our example, the purchase price of our delivery truck is $47,500, but we are only financing $37,500 of that price. The balance of $10,000 was a cash down payment.
- Indicate whether the loan will have a Constant interest rate or a Variable rate:
- If the interest rate will remain constant throughout the forecast period, select Constant rate and enter the interest rate:
- If the interest rate will vary during your forecast period, select Variable rate and plot the interest in the chart:
- If the interest rate will remain constant throughout the forecast period, select Constant rate and enter the interest rate:
- When the details have been entered, click Create & Exit:
This entry will add the loan amount ($37,500 in this example) to the Cash line of your Current Assets on your Balance Sheet. At the same time, it will add a liability on your balance sheet for the same amount. The portion of the liability to be paid back within the current 12 months will appear as Short-Term Debt, with the remaining portion appearing under Long-Term Debt.
When a business borrows money, the amount borrowed is recorded as an increase in the Cash account, which is part of the Current Assets section on the Balance Sheet. This reflects the fact that the business now has more money available to them. However, the business also has an obligation to repay the loan, so the Balance Sheet must also reflect this. To do this, the business records a corresponding liability for the same amount, which represents the obligation to pay back the loan.
The liability associated with the loan is categorized based on the repayment terms. The portion of the loan due within the next 12 months is classified as Short-Term Debt under Current Liabilities to indicate the immediate obligation. The remainder of the loan, due after 12 months, is classified as Long-Term Debt under Long-Term Liabilities. This categorization helps understand the company's debt obligations and their impact on cash flow over different periods.
Do I need a forecast entry for my down payment?
You don't need to make a separate forecast entry for your down payment. Your asset entry represents the cash being spent, and the loan represents cash coming into the company to make that purchase. Since your asset purchase is more than your loan amount, the difference (the down payment amount) will automatically be calculated in your forecast as cash spent.