As we have learned, separate funds are actually an entirely different set of books or “companies.” This means that any transfers between these companies should be treated as a loan.
So if one of your funds should find itself short on cash, they may borrow money from another fund to carry them through until it recovers.
When a loan is required, you should establish a definite plan for its payment. If you do not establish a payment mechanism, you should treat the transfer as a gift from one fund to the other, since the loan is unlikely to be repaid.
» To interpret the transfer as a loan:
- Giving Fund—Write check to Receiving Fund using a liability account.
- Receiving Fund—Deposit money into a liability account.
- Receiving Fund—Send payment to Giving fund by writing check using a liability account.
- Giving Fund—Received payment by depositing into a liability account.
» To interpret the transfer as a gift:
- Giving Fund—Write check to Receiving Fund using an expense account.
- Receiving Fund—Deposit money into an income account.