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Proper Bookkeeping for Loan or Line of Credit

Introduction

When you obtain a loan or line of credit, you’ll want to ensure that you track it correctly in your books. The desired results should be your loan principal on your Balance Sheet as a Liability, and your paid Interest under Expenses on your Profit & Loss (Income Statement) report.

In this article, we recommend the best way to track your loan and loan payments in CosmoLex, however we suggest that you speak with your accoutnant or a CosmoLex Certified Consultant if you have any additional questions about your specific situation. 

Recording the Loan or Line of Credit

Before you start recording loan payment transactions in CosmoLex, you’ll want to record the loan itself. To do this, follow these instructions:

1. Create a liability account in your Chart of Accounts for your loan. CosmoLex already has a 2500: Line of Credit (Current Liability) account that can be used, if appropriate.

2. Next, you’ll want to tell the system how much your loan is for. Most times, you will receive the loan in your business operating account. If this is the case, you can create a deposit transaction in the appropriate bank account. In the Account field, select your newly created [loan] account or the 2500: Line of Credit (Current Liability) account. This transaction will automatically create a journal entry in your new account with the opening balance.

 All set! You’ve recorded your new Loan or Line of Credit

Record Payments to Loan or Line of Credit

Now that your loan is properly recorded, you’ll want to make sure your payments are always posted accurately. To accomplish this, we recommend that you use our Accounts Payable tool This will allow you to make this a recurring payment in CosmoLex, not only making it more convenient for you, but also preventing manual errors on a monthly basis since the setup will be done once (or as needed if a change occurs in your loan).

1. Add a bill under Accounts Payable. Not sure how? Learn more here.

  • Ensure the amount is for the full amount you agreed to pay (principal + interest)
  • Under Options, check the box for Recurring and select the appropriate time interval
  • For the Account field, click the split icon to post the bill to multiple accounts. In the Split Transaction account, select the following:
    • Your newly created [loan] liability account – Debit principal amount
    • 6325: Interest Expense (Expense) account – Debit interest amount

  • When ready, click Save

2. Now you will automatically see a bill at the time interval you selected. Pay your bill and this will automatically post the amounts to the correct account. Not sure how to record bill payments? Learn more here.

Important

If the amount required to be paid changes for any reason, you must change the accounts payable bill to reflect that change. Make sure you change the total amount, as well as the amounts that are being debited to each account.

Updated on September 6, 2018

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