The first thing I need to do is define what a discounted note is. Normally when we borrow money we borrow a set some of money and repay it with interest. So if I borrow $100,000 at 6.75% to be repaid in 5 years then the Total amount I pay back by the end of 5 years is 118,100.76. You can learn more about how to account for loans to your company in my blog post entitled (oddly enough) How to Account For Loans to Your Company. The other way to set up a loan is to create what is called a discounted note. This means I receive less than the face amount of the loan and pay back the full amount. The difference is the interest, or the loan fee. However you want to call it. In this segment I am going to show you how to do the accounting for this both as borrower and as lender.

First let’s look at a Discounted Note from the point of view of the borrower.

It is often best to lay it all out like this on a spreadsheet before you enter the discounted note into QuickBooks. This enables you to see the whole picture which helps to show what we want to create in QuickBooks so that we can properly reflect this transactions. As the borrower we need to show the net amount received (deposit into the bank) of $9,460 with a total loan payable of $10,000 and fees of $540:

Face Amount 10,000.00
Commission (500.00)
Processing Fee (10.00)
Origination fee (30.00)
Net 9,460.00

It is often best to lay it all out like this on a spreadsheet before you enter the discounted note into QuickBooks. This enables you to see the whole picture which helps to show what we want to create in QuickBooks so that we can properly reflect this transactions. As the borrower we need to show the net amount received (deposit into the bank) of $9,460 with a total loan payable of $10,000 and fees of $540.

The same discounted note from the perspective of the lender is essentially the same, but of course everything is flipped. So we need to show a net amount disbursed of $9,460 with a total loan receivable of $10,000 and fee income of $540. In this screen cast I will demonstrate

How to set both scenarios up in QuickBooks. You can do this as a journal entry or directly in the appropriate transaction type (Deposit for the borrower, Check for the lender).

Note: The critical ones out there who really know their accounting are going to say that the fees should be accrued and recognized over the life of the loan. If you wanted to account for it this way then you would book the fees to an asset account (lender) or Liability account (borrower) and then you would recognize a proportionate amount of the fees each time you make or receive a payment on the note. I am not going to cover that in this screen cast.