Setting up a Loan or Line of Credit
Some businesses have a line of credit to cover short term cash shortages. A line of credit can take many forms. Generally, a company makes a request to borrow money against their line of credit via fax or email. The money is then electronically deposited into the company’s bank account. The business may pay interest only or a combination of interest and principle. These payments are typically made electronically by the bank per the company’s request (no checks are sent).
To set up a line of credit to show interest expenses and principle payments, follow the steps below that best suit your needs:
Note: The accounts used here are for illustrative purposes only. Please consult your accounting professional for the exact accounts to use.
Create a long term liability account to track what you owe:
- From the main menu, click Banking | Chart of Accounts List. Right-click anywhere in the list and select New Account from the pop-up menu.
- From the Type drop-down list, choose Long Term Liability.
- Create an account to track the liability. Enter an appropriate name (“Line of Credit” for example). Do not use the Opening Balance field or the As of Date.
- Click OK.
Create an account to track interest payments (expenses).
- Create an account to track the interest expenses. From the Type drop-down list, choose Expense.
- Enter a Name for the account (“Line of Credit Interest”, for example).
- Click OK.
Depositing money from your line of credit:
This section explains how to recognize the money that has been borrowed against your line of credit and deposited into your company’s bank account.
- Go to Banking | Make Deposit.
- In the Deposit To field, select the bank account your bank will transfer the money into.
- In the Date field, enter the date of the actual transfer.
- In the Entry # field, enter something logical. Usually we recommend that you enter “ACH” followed by a transaction number of your choice. This can be the current date, your loan request number, or a number assigned by the bank.
- In the Memo field, enter a memo explaining the source of the loan, notes, etc.
- In the Received From field, select your Bank. Your bank should already be setup as a vendor. Use the Add New option if needed.
- In the From Account, select your new account “Line of Credit”.
- In the memo field, enter a memo as needed.
- In the Pmt. Method field, select the appropriate method. We usually recommend “ACH”. These letters indicate that this was an electronic transaction.
- In the Amount field, enter the amount of the loan.
- The Department selection is not relevant.
- Double check your work and click OK when satisfied.
These steps will put the money in your bank and setup a Long Term Liability. In other words, your bank account will be credited and your Long Term Liability account will be debited. Your form should look something like the example below.
Make an interest or loan payment:
You may be required to make interest payments or pay against the principle (the money you borrowed). Typically your bank will automatically take money from your bank account each month to cover interest charges. This section explains how to record that event.
- Go to Banking | Write Checks (CTRL + W).
- On the Expenses tab, select “Line of Credit Interest” and enter the amount of the interest that you paid. The interest amount will be shown on your bank statement or the bank’s website.
- If you are making a payment against the principle (the loan amount), select the Line of Credit and enter the amount of the principle you are paying.
- Click Save & Close.
These actions will increase the interest expenses on your income statement. If you paid on the principle, your Line of Credit amount (on the balance sheet) will be lowered. Your check should look something like this:
- If for any reason you cannot locate a particular Chart of Account in the “Account” drop-down for your Checks, Deposits, or any other similar transaction, you may need to disable the “Smart Account Selection Filtering” preference. This can be found inPreferences | Chart of Accounts tab.
- You can always go back and edit the check if your bank sends you a statement of some type informing you of your prior month’s interest and principle amount. You may also make an Adjusting Journal Entry but we typically do not recommend the use of adjusting journal entries.
Preferences – Chart of Accounts