Interfund Borrowing

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:

1. Giving Fund—Write check to Receiving Fund using a liability account.
2. Receiving Fund—Deposit money into a liability account.
3. Receiving Fund—Send payment to Giving fund by writing check using a liability account.
4. Giving Fund—Received payment by depositing into a liability account.

» To interpret the transfer as a gift:

1. Giving Fund—Write check to Receiving Fund using an expense account.
2. Receiving Fund—Deposit money into an income account.