Oh No! “Remaining payments are not equal to Contract Balance Remaining.” (Part 1)
Accurate recording and balancing of lease/loan entries are crucial to ensuring that your financial statements reflect your true financial position and meet compliance requirements. Out of balance entries may cause misstatements in the trial balance and the financial statements.
How do you know if your contract is out of balance?
- You can add “out of balance” as a Message to display when anyone opens the contract.
- If you have the General Ledger Link module, you will see out of balance New Contract Journal errors.
- You can run the Payment Proforma Report and select “Out of Balance Contract Only.”
You can also run the sql queries looking for contracts with OUT.OF.BALANCE = “1”
You should run the Payment Proforma Report as well as a sql query as there are times when the OUT.OF.BALANCE flag is not set.
What does it mean if your contract is out of balance?
- In simple terms, it means you booked it incorrectly.
- If you have the General Ledger Link module, you won’t get New Contract Journal entries flowing through to your general ledger, which means your general ledger won’t reconcile to your servicing system.
- If you do not have the General Ledger Link module and are making manual journal entries, the contract will show up on your New Contract Report, using the Gross Contract amount entered, but the general ledger won’t match your servicing system balance.
What are the ramifications of an out of balance contract?
- The Principal Balance does not = zero at end of loan.
When you book a contract, in any portfolio system you are using, you will need to enter the following main fields:
- Commencement date (firm term start date)
- Term
- Gross Finance (amount of future earnings)
- Payment amount
- Payment due date
- Assets
Once all your needed financial fields have been entered, and you save your contract, the system will perform a “balancing function.”
If your Gross Contract does not equal your payment amount times your term, you will get an “out of balance” message.
- You can save your contract out of balance and fix it later, but you will not get a new a New Contract Journal entry if using the General Ledger Link module.
For example, if you book a contract with the following structure, it will be out of balance:
Gross Contract $13,260 – manually input
Gross Finance $1,844.71 - manually input
Equipment Cost $11,415.
- You enter a payment amount of $221.10.
- You enter a term of 60 months.
- 221.10 * 60 months = $13,266 is the calculated payments remaining, performed by the “balancing function.”
- $13,260 - $13,266 = $6 is the out of balance amount. (In part 2, we’ll learn how to balance this contract.)
Tip: It is good practice to include printing and reviewing the contract amortization schedule in your corporate policies and procedures, right after contract “Booking.” This will catch initial booking “Out of Balance” errors.
Tip: Be aware that some loans may display on the Payment Proforma Report even though they are not out of balance; Term Loans do not go through the normal contract balancing process.
Contact Tamarack for additional information on how to balance a contract at discover@tamarack.ai