When a property is sold that has an outstanding loan against it, the journal entry must account for the proceeds from the sale, the loan repayment, and any gain or loss on the sale. Here is how to record the journal entry:
Scenario
- Sale price of property: ₹1,200,000
- Book value of property: ₹900,000
- Outstanding loan amount: ₹400,000
- Gain on sale of property: ₹300,000 (since ₹1,200,000 - ₹900,000 = ₹300,000)
Journal Entries
Record the sale of the property:
- Debit the Cash/Bank account with the sale price.
- Credit the Property account with the book value.
- Credit the Gain on Sale of Property account with the gain amount.
Repay the loan:
- Debit the Loan Payable account with the outstanding loan amount.
- Credit the Cash/Bank account with the same amount.
Combined Journal Entry:
| Date | Particulars | Debit (₹) | Credit (₹) |
|---|---|---|---|
| 2024-06-30 | Cash/Bank A/c | 1,200,000 | |
| To Property A/c | 900,000 | ||
| To Gain on Sale of Property A/c | 300,000 | ||
| (Being sale of property recorded) | |||
| 2024-06-30 | Loan Payable A/c | 400,000 | |
| To Cash/Bank A/c | 400,000 | ||
| (Being repayment of outstanding loan) | |||
Explanation:
- Cash/Bank A/c: This account is debited to show the inflow of cash from the sale of the property.
- Property A/c: This account is credited to remove the book value of the property from the books.
- Gain on Sale of Property A/c: This account is credited to record the gain realized on the sale.
- Loan Payable A/c: This account is debited to show the reduction of the outstanding loan.
- Cash/Bank A/c: This account is credited to reflect the outflow of cash for the loan repayment.
Example Breakdown:
- Record the sale of the property:
| Date | Particulars | Debit (₹) | Credit (₹) |
|---|---|---|---|
| 2024-06-30 | Cash/Bank A/c | 1,200,000 | |
| To Property A/c | 900,000 | ||
| To Gain on Sale of Property A/c | 300,000 | ||
| (Being sale of property recorded) | |||
| Date | Particulars | Debit (₹) | Credit (₹) |
|---|---|---|---|
| 2024-06-30 | Loan Payable A/c | 400,000 | |
| To Cash/Bank A/c | 400,000 | ||
| (Being repayment of outstanding loan) | |||
These entries ensure that the sale of the property, the repayment of the loan, and any resulting gain or loss are accurately reflected in the company’s financial statements.
