Accounting for Government Funded Grants and Loans

We work with many sole traders, partnerships and limited companies and as the grants and loans roll in from Government backed schemes it begs the question “How should these grants and loans be recorded in a set of business accounts?”
 

How to treat Government Funded Grants and Loans in your Accounts

Firstly, it doesn’t matter how you normally prepare your accounts, whether it’s on an Excel spreadsheet or one of the many various computerised accounting packages. The main thing you need to differentiate is which financial statement the grant or loan sum should appear; The Balance Sheet or the Profit and Loss statement.

  • The Profit and Loss statement is an overview of a business’s Income and Expenditure.
  • The Balance Sheet is an overview of a business’s Assets and Liabilities.

 

Grants

Let’s look at the government backed GRANTS that have been made available:
 

Small Business Rate Relief (SBRR)

https://www.gov.uk/apply-for-business-rate-relief/small-business-rate-relief
 

Rural Rate Relief (RRR)

https://www.gov.uk/apply-for-business-rate-relief/rural-rate-relief
 

Self Employed Income Support Scheme (SEISS)

https://www.gov.uk/guidance/claim-a-grant-through-the-coronavirus-covid-19-self-employment-income-support-scheme
 
These are Grants Received and treated as income. They are taxable but not VATable. They will be recorded as INCOME and will appear on the Profit and Loss statement.

Our recommendation would be to open up a new nominal code within the Chart of Accounts and name the account: ‘Grants Received’
 

Coronavirus Job Retention Scheme (CJRS)

This is a reimbursement of Wage Costs. The claim amount received is taxable but not VATable and recorded within the Profit and Loss as a CREDIT.

Our recommendation would be to open up new nominal codes within the Chart of Accounts under your Wages Grouping nominals and name the account ‘CJRS claims’. If you normally record wages as a DIRECT COST the new nominal would be set up here. If you record wages as an OVERHEAD the new nominal would be set up here. Both are acceptable as they report through to the P & L. However, if you record the CJRS claim amounts as a CREDIT to a COST of SALE (Direct Cost) nominal this will affect your GROSS PROFIT. If you record the CJRS claim amount as a CREDIT to an EXPENSE (Overhead) nominal this will affect your NET PROFIT.

For more information on the CJRS visit:
https://www.gov.uk/guidance/claim-for-wages-through-the-coronavirus-job-retention-scheme
 

Loans

Let’s now look at the government backed LOANS that have been made available:
 

Coronavirus Business Interruption Loan Scheme (CBILS)

https://www.gov.uk/guidance/apply-for-the-coronavirus-business-interruption-loan-scheme
 

Bounce Back Loan Scheme (BBLS)

https://www.gov.uk/guidance/apply-for-a-coronavirus-bounce-back-loan
 
These are Loans Received and NOT treated as Income. The Loan Sum will be recorded as a LIABILITY of the business and the Capital outstanding will appear on the Balance Sheet. Loan Interest paid will be recorded as an EXPENSE in the Profit and Loss account. Therefore, when recording repayments of the loan in the accounts you will need to split the Capital and Interest elements accordingly. It would also be advisable to split the AMOUNTS DUE on the Loan Sum to account for ‘amounts due within 1 year’ and ‘amounts due after 1 year’. This will provide further insight within the accounts to identify the loan as a CURRENT Liability or a LONG TERM Liability.

The BBLS is likely to be a LONG TERM liability with no repayments in the first year and then over the allowable 5 years if the business chooses the maximum loan term without early repayment. The CBILS could be a mixture of Current and Long-term Liability in the Balance Sheet and should be split accordingly depending on the Loan Agreement terms.

Our recommendation would be to open up new nominal codes within the Chart of Accounts and name the accounts: ‘CBILS LOAN <1 year’, CBILS LOAN >1year’, BBLS LOAN
 

Some Points to Consider…

We understand how important it is at this current time of uncertainty to provide an overview of the schemes available to businesses and individuals so they may make informed decisions for themselves. Some things to consider before jumping on to these schemes:

  • Are you or your business eligible for each scheme on offer? Find out what you’re eligible for here – https://www.gov.uk/business-coronavirus-support-finder
  • Was your business in good financial standing before the COVID-19 crisis hit?
  • Have you got robust systems in place to deal with a downturn in business?
  • Have you got robust systems in place to deal with a surge in business?
  • Can you weather the financial storm without reliance on such schemes?
  • Do you know what your current/short-term cashflow issues are?
  • Have you projected your long term forecasting in conjunction with flexible business planning and modelling? Have you considered a wide range of scenarios that could potentially have a huge impact on you and/or your business?
  • Do you need to make further considerations regarding staff productivity and retention of your workforce? What impact could that have on the health of your financials and your business culture?
  • Will you be able to retain and pay staff once the CJRS scheme expires (currently 1st July 2020 unless it is extended)?
  • Have you explored the option to adapt and implement new measures and processes to diversify your business to optimise your business’s survival in this ever-changing and fast paced society?
  • Do you view the current crisis as an opportunity to create something better?
  • Do you have a trusted communicator you can use as a sounding board to discuss your business’s needs prior to making financial decisions?

If you can answer ‘YES’ to all of these questions you have a truly adaptable and successful business already and will fare well as we ride the storm of uncertainty over the next few months.

If you want to answer ‘YES’ to all of these questions, we look forward to being able to help you through the next few months by working with you to strategically plan for your future success. Give us a call to see how we can help you and your business.

We will weather the storm, together!

*Accounting and Bookkeeping is a regulated profession. We are licensed and supervised by The Institute of Certified Bookkeepers UK. Practice Number: 17249