Most businesses at some point during their operations will take a loan from a bank or personal financier to help purchase equipment, consolidate debt, or use a line of credit to help meet the cash flow needs of the business. Depending on the kind of loan and what it was used for different account types in QuickBooks will be used.
Types of Loans and Credits
Most businesses borrow money for both long-term periods (periods of more than one year) and short-term periods (periods of one year or less). Long-term debt can include a 5-year car loan, 20-year mortgage, or any other type of debt that is paid over more than one year.
Here is a list of the common loan account types we typically see with clients:
Business Equipment Loan - These loans are used to purchase large items such as industrial printers for a greeting cards manufacturer or ovens for a restaurant. The amount of the loan that is given to purchase this equipment goes to a Long Term Liability account called perhaps ‘Name of Equipment Loan’ and is offset by booking the amount to a Fixed Asset account called Fixtures & Equipment.
Car Loan - A very common loan for a lot of businesses. Just like the equipment loan the amount that is given for the car loan is booked to a Long Term Liability account that could be called ‘Name of Car Loan’ and is offset by booking the amount of a Fixed Asset account called ‘Year - Model of Car’.
Line of Credit (LOC) - This sort of loan is a revolving line of credit typically used when a business is unable to meet an expense such as payroll and needs the ability to withdraw a large amount of cash fast. Typically the loan is paid off within a week of using it. The typical line LOC entry in QuickBooks is a transfer of funds from the Other Current Liability LOC account to the bank the money was transferred to.
Debt Consolidation - Some businesses may find they have put their business into a surmountable amount of credit card and loan debt of different types. Interest rates might be extremely high on the credit cards and maybe another loan as well. A banking institution or personal financier might approve to pay these down to consolidate them into a single low interest rate loan for your business. Figure out which accounts in QuickBooks need to be $0 and pay the total amount down in the credit card, long term liability, or other current liabilities account's register to $0. Offset the entry by booking the amount to a Long Term Liability account called ‘Debt Consolidation Loan’.
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Recording a Long-Term Debt
When recording the payment on a long-term debt for which you have a set installment payment, you may not get a breakdown of interest and principal with every payment.
For example, many times when you take out a car loan, you get a coupon book with just the total payment due each month. Each payment includes both principal and interest, but you don’t get any breakdown detailing how much goes toward interest and how much goes toward principal.
Why is this a problem for recording payments? Each payment includes a different amount for principal and for interest. At the beginning of the loan, the principal is at its highest amount, so the amount of interest due is higher than later in the loan payoff process when the balance is lower.
As you lower your principal balance, much less of your payment goes toward interest and much more goes toward reducing principal. That’s why many financial specialists advice you to pay down principal as fast as possible if you want to reduce the term of a loan.
Important Notes
In order to record long-term debt for which you don’t receive a breakdown each month, you need to ask the bank that gave you the loan for an amortization schedule. Anamortization schedule lists the total payment, the amount of each payment that goes toward interest, the amount that goes toward principal, and the remaining balance to be paid on the note.
Some banks provide an amortization schedule automatically when you sign all the paperwork for the note. If your bank can’t give you one, you can easily get one online using an amortization calculator.
Properly recording loans in QuickBooks is another very important part to your monthly bookkeeping processes. It not only helps book the interest expense to your financial statements but it also shows what your business's true liabilities are to its debtors giving you, the business owner, a better understanding of the overall financial health.
