129: Recording Loans In QuickBooks Whether You Are Starting A Business Or Side Hustle
- Financial Adventure, LLC
- Mar 22, 2023
- 10 min read
129: Recording Loans In QuickBooks Whether You Are Starting A Business Or Side Hustle, A Solopreneur, Entrepreneur, Mompreneur, Freelancer, Bookkeeper, Virtual Assistant, Business Owner, Or Self-Employed
A common question I receive from clients is how they should be recording their loans in QuickBooks. I often see clients set up their loans the wrong way. They will sometimes appear on a report where they shouldn’t be, which can throw off any tax planning the client is trying to do. I know clients are trying their best and working hard to keep up with their bookkeeping, but every month when they record their loan payments, they know they are not doing it correctly, and it lowers their confidence when it comes to relying on their financial statements to make sound business decisions. In today’s podcast episode, I’m covering all the steps you should take when you have a loan in QuickBooks. Once you have this process in place, it really makes recording your transactions easy, and you’ll gain the confidence you need so that you can start relying on your financial statements again. Whether you are starting a business or side hustle, you’re a self-employed individual, a solopreneur, entrepreneur, mompreneur, freelancer, small business owner, a remote, virtual, online, or in-house bookkeeper, or a virtual assistant or VA; most businesses will have a loan at some point in time, and knowing how you should be recording all the transactions involved with your loan will help you create accurate financial reports that you can use not only in your business but for filing your tax return as well. These tips are essential whether you are using a computerized software system like QuickBooks, Xero, Wave, FreshBooks, or HoneyBooks for your business finances; or doing your bookkeeping manually with an Excel spreadsheet or even a Google Document…
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Show Notes:
A common question I receive from clients is how they should be recording their loans in QuickBooks. I often see clients set up their loans the wrong way. They will sometimes appear on a report where they shouldn’t be, which can throw off any tax planning the client is trying to do. I know clients are trying their best and working hard to keep up with their bookkeeping, but every month when they record their loan payments, they know they are not doing it correctly, and it lowers their confidence when it comes to relying on their financial statements to make sound business decisions. In today’s podcast episode, I’m covering all the steps you should take when you have a loan in QuickBooks. Once you have this process in place, it really makes recording your transactions easy, and you’ll gain the confidence you need so that you can start relying on your financial statements again. Whether you are starting a business or side hustle, you’re a self-employed individual, a solopreneur, entrepreneur, mompreneur, freelancer, small business owner, a remote, virtual, online, or in-house bookkeeper, or a virtual assistant or VA; most businesses will have a loan at some point in time, and knowing how you should be recording all the transactions involved with your loan will help you create accurate financial reports that you can use not only in your business but for filing your tax return as well. These tips are essential whether you are using a computerized software system like QuickBooks, Xero, Wave, FreshBooks, or HoneyBooks for your business finances; or doing your bookkeeping manually with an Excel spreadsheet or even a Google Document…
Welcome Back…Making a decision to take out a loan for your business is a big step. You may need additional funds to purchase equipment, have additional operating funds, use the money for marketing, or refinance to pay off other loans. No matter what the reason for taking out the loan is, you want to make sure that you are recording it correctly so that your financial statements reflect these amounts accurately and you can make good business decisions based on this data.
I’ve seen many clients add an expense account called loan payments, and they record all of their payments to this account. I’ve even seen business owners record their personal mortgage payments in their business as an expense. In both of these instances, they are recording incorrect expenses, which in turn reflects a lower net income amount. After the adjustments are made, and the net income comes up to the correct amount, many business owners are surprised at the amount of taxable income they have. I want to ensure that you don’t fall into this same situation by helping you understand how you can record your loans the appropriate way and have accurate financial statements that you can rely on.
To help you understand the process of recording your loan transactions in either QuickBooks Desktop or QuickBooks Online, I’m going to create a scenario where you are taking out a loan for $25,000 to purchase equipment for your business. Although these steps are for QuickBooks, if you are utilizing another computerized software system for your bookkeeping, you’ll follow the same procedures. The first step in recording your loan is to set up the loan in your chart of accounts. To do this, you will open your chart of accounts and select add new account. You’ll want to know how long you have to pay back your loan or what your intentions are for paying back the loan. When you are adding your new loan, you’ll either select the long-term loan type if you are planning on paying off your loan in twelve months or more. If you plan to pay your loan off sooner, you will then select other current liabilities. I recommend you name your loan account with something that you will be able to recognize. Including the last few numbers of the loan can help if you have multiple loans. When you are adding a loan to your chart of accounts, it will show up on your balance sheet since it is a liability, and when you select either long-term or current liability, it will show up in different places on your balance sheet.
The next step is to record your loan. You can do this in a couple of different ways. I always tell my clients to track the money. If you take out the $25,000 loan and you have the money deposited into your bank account, you can simply make a deposit in your bank account and select your new loan account as the account to record it to. When you do this, you can look at your balance sheet, and you will see your new $25,000 loan in your liability section. This option works well if you are taking out a loan for funds to use in your bank account. In our case, the $25,000 will go into our bank account, and we will be writing a check to the vendor we are purchasing the equipment from for $25,000.
Another option is when you take out a loan, and the lender pays the amount directly to whom you owe. For example, you go to the bank for the $25,000 loan, and the lender sends the money directly to the vendor you are purchasing the equipment from. In this case, you will never show this amount coming out of your bank account since you are not physically paying your vendor. You will need to record your loan in this situation as a journal entry. To do this, you will add a new journal entry, and you will debit your fixed asset account for the equipment you are purchasing, and you will credit your new loan account for the total amount of the loan. If there are any other fees the lender is charging, you can record them in this journal entry as well. Again, for our example, let’s say that we are taking out a loan for $25,000 for equipment, but the lender is charging $500.00 in fees, and the total of the equipment is $24,500.00. The journal entry for this loan transaction would be to debit fixed assets for the equipment for $24,500.00, debit bank service charges of $500.00, and credit the new loan account we set up for the full $25,000 that the loan is for. Again, once this journal entry is made, you can take a look at your balance sheet to see that your loan is in the liabilities section, and you can also see that in the fixed asset section, your new equipment of $24,500 will show up there as well. The $500 for fees will show up on your income statement as an expense. When you are recording your journal entry, I always recommend that you list a description in the memo field for any fixed assets.
Once the loan is recorded, you can start applying payments to it. Most loan payments are made up of two parts. Your principal amount will be what you are paying off on the loan, and your interest amount is the expensed amount that you will deduct on your income statement. Each time you make a payment, your total amount due will be reduced by the principal amount. For our example, let’s say that we need to make a $500 loan payment. This payment is made from our bank account. To record the loan payment, you can record the payment as a check. You’ll enter your lender as the vendor, the total amount paid as $500.00, and in the account section, you’ll enter the principal amount under the loan account, and any interest will go to the interest expense account. When recording a check like this, it is considered a split transaction since you are splitting the total of $500.00 into two different accounts. Let’s say that our payment of $500.00 included the principal amount of $400.00 and interest of $100.00. We would select our loan account and reflect the $400.00 and then record the additional $100.00 as interest expense. When you have your payment recorded, you can go to your balance sheet again and look at the balance due on your loan. It should reflect the same amount as the lender shows on their statement. You can also look at all of the loan payment details by double-clicking on the total amount of the loan and reflecting the dates you want to see the transactions from on the transaction detail report that comes up when you double-click on the loan balance.
Once you have recorded all of your payments for your loan and your loan has been paid in full, your loan balance will have a zero balance and will no longer show up on your balance sheet. You will have expensed all of the interest in the appropriate years as you were making your loan payments. If you don’t receive a listing of your principal and interest amounts, you can always contact your lender and ask them for this information so that you can record all your transactions correctly.
Knowing how to record your loans, as well as the payments that go along with your loan, is important so that your financial statements reflect the correct amounts. You can easily look at your balance sheet to see all of your liabilities, and at any point in time, you’ll know exactly how much money you owe to others. Gaining confidence in recording your loan transactions is one more step you can take to having a bookkeeping system that you can rely on to have accurate and timely financial statements. Making sure you have all your information correct so that you can have your tax return prepared accurately will definitely help reduce your stress at tax time. I’m always looking for solutions to help relieve stress for business owners like you, as well as the accountants, CPAs, tax preparers, and bookkeepers who are helping you make sure you are staying in compliance with your tax filings. During the month of March, I am giving back to the accountants, CPAs, bookkeepers, and especially tax preparers who are taking on additional tasks during tax season to help their clients. I know how hard it can be during a busy season when you are working lots of hours, and there are many deadlines to meet. I also understand how much it can impact your personal life, so I would love for you to let your accountant, CPA, bookkeeper, or tax preparer know that I am doing a drawing to give away five free coaching packages where we’ll take time to work towards having a less stressed tax season and reduce feelings of overwhelm so that they are able to work at a higher capacity. If you are an accountant, CPA, bookkeeper, tax preparer, or financial professional yourself, you can go to www.FinancialAdventure.com/accountant to get all the details and to register during the month of March 2023. If you know of an accountant or financial professional who could benefit by taking some time for themselves and improving their lives, please forward this information on to them; I’m sure they will be grateful for the opportunity and that you are thinking about them. If you are listening to this podcast after the month of March 2023, you can check back to see if I am offering any other specials to thank you for all that you do to help business owners ensure they are successful in their businesses. They need you, and you are appreciated. I’ll post links to this and other helpful resources for accountants and business owners where you are listening to this podcast.
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