The following overview has been provided by Edwin Radke, CA CPA to provide insight into how organizations can properly record and account for the transactions associated with the $40,000 Canada Emergency Business Account, or CEBA, loan.
Once you have been approved for the Canada Emergency Business Account loan, the funds will be deposited directing into your corporate bank account. To record this transaction, you should consider the following steps.
Recording the initial deposit
Step 1: Create a new General Ledger Account in your accounting software
This account should be a long-term liability account and you can name it anything you like, for this example, I am using “CEBA Loan”.
The account name and whether it is short term, long term, loan, or some other category your software uses is not of significance. What is important is that it is a liability account showing on your balance sheet.
Step 2: Record the deposit
Record a deposit directly to your bank with the offset to the newly created account, CEBA Loan. The entity you are receiving the funds from is your bank, via the Government of Canada. I would recommend using “Government of Canada” as a “contact” rather than your bank to easily identify the transaction in the future.
Most accounting software packages have a “banking” section that allows you to record a direct deposit to the bank. Ensure there is no GST/PST/HST recorded on the transaction.
As an alternative option, you can create an invoice and have the loan payment recorded as receipt. When creating the invoice, post to the CEBA loan account and ensure no sales tax.
YOU’RE DONE FOR NOW – your bank should reconcile at month end. You can verify you have recorded the correctly simply by looking at your balance sheet. Your bank balance under assets should be up $40,000 and you should have a liability account showing $40,000.
As part of the loan covenants, you are to use the funds to pay for operating costs that cannot be deferred, such as payroll, rent, utilities, insurance, property tax and regularly scheduled debt service.
While there are no specific requirements for reporting what expenses the loan funds cover, this information would have to be provided in the event of an audit by the CRA or your financial institution, so keeping an accurate record is in your best interest.
The funds are mixed with your bank account, so how would you record what you spent the loan funds on? You could simply review your expenses, add them up and note them as being funded by the loan.
However, if you would like to have more detail, you can follow these steps.
Step 1: Regular transactions
Pay your bills as usual.
Step 2: Create liability accounts
Create two new long term liability accounts. One account should be named “CEBA Expense”, the other, “CEBA Contra Expense”. Again, the names are not significant, change as appropriate.
Step 3: Journal your expenses
Each time (or each week/month) you want to note expenses as being paid from the “loan” funds, create an adjusting journal entry in your software. You should debit the CEBA Expense account and in the memo note the vendor or detail as appropriate. Credit the CEBA Contra Expense account. Do not include sales tax on the amounts. The date should be the date of the expense or alternatively, the month end of the expenses.
These accounts will show on your balance sheet and should offset each other. The purpose will be to easily review the detail of the CEBA Expense account and determine where you spent the loan funds.
Step 4: Repeat
Repeat the journal entry each time or period you want to note expenses as qualifying for use from the loan funds. Do this until you have passed $40,000.
As an option to the above steps, you could create a new expense account or accounts. You could note them as “CEBA XXXX Expense”. Then, when recording expenses, post to these expense accounts rather than your regular accounts. Note, that this option might create more work, depending on the number of vendors, how payroll is recorded, and if expenses would flow over two fiscal periods.
Repaying your loan
Repayment of the loan and recording the loan forgiveness transactions will occur in the future. At that time, you could follow these steps.
Step 1: Create a new account in your accounting software
This account should be a revenue account (other revenue) and you can name it anything you like, but I am using “CEBA Loan Forgiveness”.
The account name, and whether it is revenue, other revenue, or some other category your software uses is not of significance. What is important is that it is a revenue account showing on your statement.
Step 2: Write a cheque to the Government of Canada
While the actual re-payment process is not defined yet. For the purpose of this article, we are writing a cheque for the re-payment.
In you software, you would write the cheque for $30,000 (or whatever partial payment amount), direct from your “banking” module. The offsets would be $40,000 to the CEBA Loan account (the liability account on the balance sheet) and a negative $10,000 to the newly creased CEBA Loan Forgiveness account.
The Canada Emergency Business Account will provide qualifying business customers and clients access to a $40,000 loan:
- 0% interest until December 31, 2022
- No principal payments until December 31, 2022
- Principal repayments can be voluntarily made at any time without fees or penalties
- $10,000 loan forgiveness is available, provided outstanding balance is $40,000 at December 31, 2020, and $30,000 is paid back between Jan. 1, 2021 and Dec. 31, 2022
- If any part of the balance is not paid by December 31, 2022, the remaining balance will be converted to a 3-year term loan at 5% annual interest, paid monthly, effective January 1, 2023
- The full balance must be repaid by no later than December 31, 2025