How to Properly Record Business Loans in QuickBooks Online

One of the most common issues we encounter during cleanup projects is the incorrect recording of business loans in QuickBooks Online (QBO). Business owners often struggle with how to properly set up loans, record payments, and handle the principal and interest breakdown. These errors can cause financial reports to be inaccurate, making it difficult to understand the true financial health of the business.

In this post, we’ll walk you through how to properly record business loans in QBO, how to interpret loan statements, and why it’s critical to track the principal and interest (P/I) breakdown correctly.

Step 1: Setting Up the Loan in QuickBooks Online

When you take out a business loan, the first step is to create a liability account in QBO to track the loan. You will also need to set up account to track interest payments. This setup ensures that the loan amount appears on your balance sheet and that the payments are recorded properly, with the principal reducing the liability and the interest being recorded as an expense.

Here’s how to set up these accounts:

1.1 Set Up a Loan Liability Account

1. Go to Transactions > Chart of Accounts > New.

2. Account Type: Select Long Term Liabilities (if the loan term is over a year) or Other Current Liabilities (if it’s a short-term loan).

3. Detail Type: Choose Notes Payable or Loan Payable.

4. Name: Give the account a descriptive name (e.g., "SBA Loan 2024").

5. Unpaid (or Opening) Balance: Enter the initial loan amount as of the date the loan was received.

6. Save and close.

This loan account will now show up as a liability on your balance sheet.

1.2 Set Up an Interest Expense Account

1. Go to Transactions > Chart of Accounts > New.

2. Account Type: Select Expenses.

3. Detail Type: Choose Interest Paid.

4. Name: Name the account, e.g. "Interest Expense – SBA Loan."

5. Save and close.

This account will be used to record the portion of your loan payments that goes toward interest. It will show up as an expense on your Profit & Loss (P&L) statement.

You don't need to set up a separate account for principal payments since they will be recorded directly against the loan liability account created in Step 1.1. When you make a loan payment, you’ll categorize the principal portion that reduces the loan balance directly to the loan liability account.

Step 2: Recording the Loan Proceeds

When the loan is deposited into your bank account, you need to record the deposit properly, so it reflects the increase in both your cash (an asset) and your loan (a liability).

Option 1: Manually Recording the Loan Deposit

To record the deposit of loan proceeds manually:

1. Go to + New and select Bank Deposit.

2. In the Account field, choose the bank account where the loan funds were deposited.

3. In the Received From field, enter the lender's name.

4. In the Account column, select the loan liability account you created.

5. Enter the loan amount in the Amount field.

6. Save and close.

This transaction shows that you received cash and owe that amount as a loan, balancing your assets and liabilities.

Option 2: Categorizing the Loan Deposit in Bank Feed

If your bank account is connected to QBO and synced with the bank feed, the loan deposit will automatically appear as a bank transaction. To properly categorize it:

1. Go to Transactions > Bank Transactions from the left-hand menu, select the Bank Account tile and find the loan deposit transaction in the For Review section.

2. Click on the transaction, and in the Account field select the loan liability account you created earlier (e.g., "SBA Loan 2024").

3. Confirm and Add the transaction.

This method ensures that your bank transactions remain synced with your loan liability account without the need for manual entry.

Step 3: Recording Loan Payments

Paying off the loan involves recording both the principal (the original amount borrowed) and interest (the cost of borrowing) separately. This is where many business owners make mistakes, often recording the full payment as an expense or incorrectly splitting the principal and interest.

Option 1: Manually Recording Loan Payments

Here’s how to manually record a loan payment:

1. Go to + New and select Check or Expense.

2. In the Payee field, select the lender’s name.

3. In the Category column, break down the payment into:

   • Principal Payment: Select the loan liability account and enter the amount of the payment that goes toward reducing the loan principal.

   • Interest Payment: Select the Interest Expense – SBA Loan account and enter the amount that covers the interest.

4. Add a description if necessary (e.g., "SBA Loan payment for June 2024").

5. Save the transaction.

This way you accurately reflect both the loan balance on your balance sheet and the interest as an expense on your Profit & Loss (P&L) statement.

Option 2: Categorizing Loan Payments in Bank Feed

If your bank account is connected to QBO via bank feeds, loan payments will appear in the For Review section. To categorize loan payments:

1. Go to Transaction > Bank Transactions > For Review.

2. Find the loan payment transaction.

3. Click on the transaction, and then click on the Split button to split the amount into two categories:

   • For the principal payment, categorize it to the loan liability account (select the SBA Loan account in the first row of the Category field).

   • For the interest payment, categorize it to the Interest Expense account (select the Interest Expense – SBA Loan account in the second row of the Category field).

4. Click on Apply and accept.

This ensures that both the principal and interest are properly recorded, helping maintain accurate records and synced transactions.

Step 4: Reading Your Loan Statement and Why the P/I Breakdown Matters

Loan statements can be tricky to read but understanding them is crucial to properly recording payments. Each loan payment includes two parts: principal and interest.

• Principal: The portion of your payment that reduces the loan balance.

• Interest: The portion of your payment that represents the cost of borrowing.

Why is it important to break down principal and interest?

• Accurate Financial Reporting: The principal repayment reduces your liability (the loan balance), while the interest is an expense. Failing to separate them can cause your liabilities to appear incorrect on the balance sheet and distort your P&L by inflating expenses.

• Tax Compliance: Interest payments are tax-deductible, but principal payments are not. Misclassifying the full payment as an expense can result in overreporting tax deductions, which could lead to issues with tax authorities.

• Loan Tracking: Breaking down the payments lets you monitor how much of the loan has been repaid and how much remains. Without this breakdown, it’s difficult to track your loan balance and interest payments over time.

If you’re unsure about how to read the loan statement, ask your lender for clarification on the P/I split.

Common Loan Recording Mistakes to Avoid

• Recording Full Loan Payments as Expenses: This is a frequent error. The principal portion should reduce the loan balance, while only the interest portion is an expense.

• Failing to Set Up a Liability Account: Without a liability account for the loan, the loan won’t appear on your balance sheet, and your financial statements will be inaccurate.

• Not Tracking P/I Separately: Failing to record principal and interest separately can lead to inaccurate tax reporting and incorrect financial data.

Why Proper Loan Recording Matters for Your Business

Recording loans accurately is essential for understanding your financial situation. Here’s why it matters:

1. Clear Financial Statements: Proper loan recording ensures that your balance sheet accurately reflects how much you owe, and your P&L statement shows the true cost of your borrowing (interest).

2. Cash Flow Management: Understanding the principal and interest breakdown of loan payments helps you budget for upcoming payments and forecast cash flow more effectively.

3. Tax Readiness: Accurately recording interest payments allows you to claim tax deductions correctly, while principal payments will not affect your tax liability.

4. Creditworthiness: Lenders will review your financial statements when you apply for future loans. Ensuring that your liabilities and expenses are correctly recorded can improve your financial standing in the eyes of potential lenders.

Accurate loan recording in QuickBooks Online is essential for clear financial reporting and proper tax compliance. By setting up loan accounts correctly, recording principal and interest payments separately, and understanding your loan statements, you can keep your books in order and gain a better grasp of your business's financial health.

If you’re struggling with loan recording or need help cleaning up your books, our team of bookkeeping experts is ready to assist. Contact us today to get your finances on track and maintain accurate, tax-ready financial statements!