We have what in practice is a loan, but the agreement is structured such that the company providing us funding owns our inventory and we are authorized to sell it. Its not a lein, they own the product. As we pay back with interest we're essentially buying back our inventory. I know the inventory assets will not sit on our balance sheet until we start paying back BUT how do we classify the obligation to pay back the amount? I feel like it should be a straight payable but am not sure.
How to classify the obligation to pay back funds
When the finance company first owns your inventory what is the entry for you? I assume they give you cash but do you then record a sale or a debt to the finance company? I ask this because if you say "they own it" then you must have sold it.
Well, you never answered my question but just a few words on your situation: If it walks like a duck and quacks like a duck (etc). This is why accountants use the "Substance over Form" viewpoint. The legal form may say this is not a loan but in substance it would be treated as one. A warning though: before you raise the issue that this is a loan be cautious that reality may "gore someone's ox" and put you in hot water.
I believe the Inventory is for you and should shown on your balance sheet as an asset, however it is a lein in that there is a Note Payable against it. You will debit cash and Credit Note Payable for the funds. Your inventory will be debited and cash will be credited. If you default on the funds they will take the inventory and you will have no note, that is Note Payable will be
debited and Inventory will be credited. If the Note is not default, the inventory is going to be sold in the normal course of business and the principal and interest will be paid and recorded.