How to record loans in QuickBooks Online is pretty simple once you break it down.

When a bank or anyone loans you money it’s usually straightforward. You are going to receive that money in your account. The minute you do receive that money, you now also have a liability. You have a debt. You owe that money back to whomever loaned it to you.

When someone loans you money, they get paid for the risk and the benefits of making their money available to you. We call that interest. Interest is the cost of borrowing money, and when you repay that loan, you pay it back with interest.

Your monthly payment is always the same every month when you’re paying off a loan.

It’s what’s going on inside of that payment changes. In the beginning more of your payment goes to interest expense, and by the end of the loan term, most of your payment is going to principal (the amount you owe).

The appropriate thing to do and how to record loans in QuickBooks Online is to split the payment each month between interest and principal. You can’t memorize this, because while the total payment is always the same, the split changes with each payment.

I have another way for how I record loans in QuickBooks Online.

My method lets you see the whole picture of what’s going on with the loan in one place.

Record the entire payment to the loan balance (principal). That understates the loan amount and understates interest expense for a minute.

Then record the interest as a journal entry, bringing everything right back into balance.

The goal when you record loans in QuickBooks Online is to wind up with the correct loan amount due on your Balance Sheet, and the correct amount of interest expense on your Profit and Loss. My method accomplishes this while also giving you great reporting.

Get the effective interest template in my online store:

Nerd’s Effective Interest Template

 

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