Tracking Financial Performance Standards of ... - Sa-Dhan

Constructing Loan Repayment Schedule Aging Schedule and Loan Portfolio Report for an MFIHere we need to understand that loan write-offs are reduced from the loan loss reserve because provisions forthese ‘overdue’ loans must have already been made earlier and also already added to the reserve. Therefore,charging these write-offs to the loan loss reserve is most appropriate.Now what happens, when already written off loans are collected?The norm is to increase income as the loan loss provision made earlier was charged as an expense. Thus, whenwritten off loans are collected, then accounting entries would be as follows (taking the same example, let us sayRs 1,000 is collected from the loan that was written off earlier)CREDIT Miscellaneous Income (Increase of Income)DEBIT Cash (Increase of an Asset)The summary of accounting entries of amount recovered from written-off loans:Particulars Entries AmountMiscellaneous Income (Increase of Income) CREDIT Rs 1,000Cash (Increase of an Asset) DEBIT Rs 1,000In summary, the following procedure is adopted while accounting for loan loss reserve.Loan Loss Reserve at the beginning of the Period+ (PLUS)Loan Loss Provision for the Period- (MINUS)Loan Write-offs during the period= (EQUAL TO)Loan Loss Reserve at the end of the period.Summary of concepts and accounting norms for Loan Loss Provision, Reserve and Write-offsA provision records the possibility that the outstandingloan portfolio of an MFI is not 100% realisable andit treats the anticipated loss in the value of loanportfolio as a business expense during the period.Loan loss reserve represents the amount of loanoutstanding that is expected to turn bad.Provision is mere accounting entry and doesn’t involvecash movement like savings for rainy dayLoan loss provision charged is an expense for theperiod, thus, it affects the Income and ExpenditureStatement. Since the corresponding credit accumulatesover time under reserve, it also affects the Balancesheet where it is shown as a negative asset (alternativelyas a liability)Dr - Loan loss provisionCr - Loan loss reserveProvisioning for loan loss, however, doesn’t affect theloan ledger.Loan losses or write-offs occur when it is determinedthat loans are no more recoverable.A write-off is an accounting procedure that removesthe outstanding balance of the loan from the grossloan portfolio and from the loan loss reserve, thus,produce changes in the asset side of the balance sheet.Dr - Loans Loss ReserveCr - Outstanding LoansHowever, write-offs do not affect the balance of thenet loan portfolio, total assets, or any equity accountunless the write-off amount is less than or equal tothe reserve, OR an increase in the loan reserve is made.Write-offs do not affect the income statement, if provisionsare made at appropriate times, however, it doesaffect the loan ledger.When write-offs are recovered, they are booked in theincome and expenses statement as miscellaneous income63