129: Recording Loans In QuickBooks Whether You Are Starting A Business Or Side Hustle

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:

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.