Recording an Owner’s Loan to the Business in QuickBooks Online

In many small businesses, the owner may need to loan personal funds to the business for various reasons, such as covering startup costs, funding a large purchase, or managing cash flow. Recording this correctly in QuickBooks Online (QBO) is essential for accurate bookkeeping and tax reporting. In this post, we’ll guide you through the process of recording an owner’s loan to the business, tracking repayments, and addressing a few important caveats to keep in mind.

Why Properly Recording Owner Loans Matters

Owner loans and their repayments are considered financial obligations and not part of regular income or expenses. Properly categorizing these transactions ensures your financial statements accurately reflect your business’s financial standing and avoids misreporting on tax returns.

Step 1: Setting Up an Owner Loan Account

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

2. Account Type: Select Long-Term Liabilities if you plan to repay the loan over a longer period (more than a year) or Current Liabilities if the loan will be repaid within a year.

3. Detail Type: Choose Loan Payable or a similar term.

4. Name: Name the account (e.g., “Owner Loan Payable”).

5. Save and close.

This account will be used to track the loan balance owed to the owner.

Step 2: Recording the Loan Deposit

When the owner loans money to the business, record the deposit in QBO to reflect this incoming cash accurately:

1. Go to + New > Bank Deposit.

2. Account: Select the business bank account where the funds were deposited.

3. Add funds to this deposit:

   • Received From: Enter the owner’s name.

   • Account: Select the “Owner Loan Payable” account you set up in Step 1.

   • Amount: Enter the loan amount.

4. Save and close.

This transaction will increase your bank balance and reflect the amount owed to the owner in the liabilities section of your balance sheet.

Step 3: Recording Loan Repayments

When repaying the loan to the owner, record each repayment against the loan balance.

1. Go to + New > Expense (or Check if paying by check).

2. Payee: Select the owner.

3. Payment Account: Select the bank account from which you’re making the payment.

4. Category: Choose the “Owner Loan Payable” account.

5. Amount: Enter the repayment amount.

6. Save and close.

Each repayment will decrease the loan balance on your balance sheet, reflecting the reduced amount owed to the owner.

Caveats and Best Practices

• Avoid Recording as Income or Expense: Do not categorize owner loans or repayments as income or expenses. This is a common mistake that can distort your profit and loss statements and lead to inaccurate tax filings.

• Separate Personal and Business Finances: For clear tracking, it’s best to avoid commingling business and personal funds. If possible, transfer funds directly from the owner’s personal bank account to the business bank account, rather than cash transactions.

• Interest Considerations: If you’re charging interest on the loan, you’ll need to record interest payments separately as an expense and consult a tax professional to ensure compliance with IRS requirements.

• Properly Track Repayments: Always apply repayments to the “Owner Loan Payable” account to keep an accurate record of the remaining balance. Avoid accidentally categorizing these payments as expenses.

The Value of Proper Record-Keeping

Accurately recording loans from the owner and repayments strengthens your business’s financial picture and ensures reliable data for decision-making. With organized records, you’ll also have a better handle on cash flow and tax compliance.

If you’re unsure about the setup or want to streamline your loan tracking, our team of QuickBooks Online experts can help. Contact us today for guidance on handling owner loans, business liabilities, and other crucial financial tasks.