- I am receiving money (increasing cash=Deposit)
- I have to pay that money back – Loan = Liability
- Is this loan being paid off within a year?
- Yes = Current
- No = Long Term
When I initially receive the loan I record a deposit for the money received and the account it goes to is a liability account (usually current). You can call it “Due To ____”. This can be applied to all loans received. Next I have to repay the loan.
When owner’s loan money to their own company there is usually no interest involved, especially if there is only one owner. So re-payment is pretty simple – you write checks to repay the loan and the account that the check is written to is the same liability account. But what if there is interest? There are really two ways to deal with the interest.
- One is to split your check and write the principal amount of the payment to the “Due To ____” account with the second line in the check’s split going to Interest expense. If you choose to do it this way you of course have to know with each check you write what the correct split is, which means you either have a statement from the lender that tells you how it is split, or you have your own effective interest table. The calculation aside, this is a complicated way of doing it. Also you often won’t have that split until the next statement comes from the lender where they will show you the payment you made and how much was applied to principal vs. Interest. So when you write the check you have to make an assumption about the split (ie use last month’s split) and then you have to go back and fix it.
- The second and frankly much simpler way is to write the check and book the entire amount to “Due To___”. Then separately book an entry for any interest. This is a journal entry and would look as follows:
|Due To _____||$xx.xx|
The second method above is a much cleaner way to do it. The video tutorial does not cover the interest part – we’ll have to post a “Part II” for that.
Oh and Hey! One more thing! There is a bonus tip in here that walks you through how to create a memorized, automatic, recurring transaction with a specified number of remaining recurrences! Exciting stuff!!
Click the movie reel to watch the video on How to Handle Loans To and From The Company: