Loan Accounts in Bookkeeping

Loans are treated differently in bookkeeping than any other transaction type. They are not tracked in Accounts Payable like bills are. They show up on the balance sheet under liabilities, which are amounts you owe to others. This is for loans from friends, relatives or banks including a line of credit from a bank.

You will need to set up the person or company that loans you money in the Vendors section. You also need to set up the loan as an account in the chart of accounts. Assign it a number that starts with 2, either 4 or 5 digits depending on your numbering system. The type will be Loan. If you have more than one loan, each needs to be set up separately.

When you receive the money, you will do a deposit transaction, indicating the bank account where the money is going and use the new loan account you created and of course, the date it was deposited, the amount and the vendor it is from. Use the vendor you set up for it. That sets up the full amount of the loan in the bookkeeping software.

When it is time to make a payment on the loan, you will use the Write Checks feature and either print a check, or not, if paid online. You choose the vendor who loaned you the money and the accounts you use will be the loan account and an interest account. If you are making a minimum payment and you have a bill or statement showing the exact amount of principal and interest you are paying, then you will put the principal amount on one line and choose the loan account. On the next line you will put the interest amount and choose the interest account. Then save it and print the check if you need to.

If you want to pay more than the minimum amount, you need to split the payment for the loan and interest amount. For example, on your bank line of credit you get a statement showing you owe $500.00 in interest and you are not required to pay any principal. Let’s say you want to pay $1500.00 on it. You will put $1000.00 on the first line and use the loan account and then $500.00 on the second line and use the interest account. Simply subtract the interest amount you are required to pay from the total amount you are paying, in order to get the remaining amount to pay on the principal.

There is no need to reconcile a loan account, but you should pay attention to the amounts on the statement. Your loan balance should match the one shown on the statement on whatever date they have there. If it doesn’t, it may be because your prior payments were applied differently than what you indicated on your payment. The bank may have assigned a payment to interest that you weren’t aware of. Definitely check it out and adjust your bookkeeping records to match so that your loan balance matches theirs on the same dates. Check your statement each month to be sure your records agree with the banks’.

Any time you want to know how much you still owe on your loans, just pull up a balance sheet report for whatever date you want and you will see a line item there for each loan you have with the balance on that date.