How to Correctly Record a Business Loan in Quickbooks

The number one mistake I see when taking over a new set of books is how loan payments are handled. While they are technically expenses, they need to be recorded using a liability account, rather than an expense account. But before you do that, you need to set up your loan in Quickbooks.

Create a loan liability account

First, you'll want to set up a Long Term Liability or Other Current Liability account (depending on the loan terms). You can do this by going into your chart of accounts and clicking add account. Choose the date it started and beginning balance if the initial deposit is not in Quickbooks.

Record the loan deposit

If you're setting up a brand new loan, you'll need to categorize that initial deposit to the loan liability account, not income. When the loan funds are deposited into your bank account, the accounting entry will be a debit to your bank account and credit to the loan account that you created in the first step.

Record your loan payments correctly

It makes sense to debit each loan payment, which would decrease the loan balance, however, that does not account for the interest in each payment. So to correctly record each payment, you'll need to know which portion is principal and which is interest. When you have that information, you'll credit your bank account for the payment amount, debit the loan account for the principal portion and then debit an interest expense account for the interest portion.

Doing it this way ensures that your loan balance remains accurate as time goes on. If you fail to record that interest in each payment, the loan balance in Quickbooks will be lower than what your loan statements say.

Reconcile your loan account regularly

Compare your QuickBooks loan balance to your lender's statements to ensure they match. If there is a discrepancy, check how each payment was recorded since the last reconciliation to see where the difference is.

Keep all loan documents

Save your loan agreement, payment schedule, and monthly statements for your records. Recording business loans correctly helps keep your Balance Sheet accurate, your financial reports reliable and your books tax ready.

Need help cleaning up your books or reviewing your QuickBooks? Book a call.