Setting up a business loan

1. Create a current liability account with the loan name, ie loanshark.
2. Create an expense account called loanshark-int-exp.

If you do not want to track the interest expense in a separate expense account, you can use a generic interest expense account for this and the other CC interest that you pay.

When you get the loan, bring up the bank register that you will be depositing the loan amount to:

1. Enter a depost in the amount of the loan
2. In the account section select the loanshark liability account.
3. Record the transaction.

A loan payment is composed of two parts, the payment on the principal and the interest payment. Interest paid is an expense and it does not lower the balance due.

The problem comes when you make payments. I have seen the suggestion that you get an amortization program and split your payments according to that schedule. That works if you only want a general idea of the loan balance, but if you want your chart of accounts to be accurate, it takes a little more work than that.

What happens is that when the loan company gets your payment, the amount of interest charged for the payment period is calculated based upon the day the payment is received and the number of days since the last payment was received and posted. And since you cannot know what day that is, that makes it hard to use a generic amortization schedule.

Typically when a loan company sends you a bill for the next payment, the previous payment is spelled out. How much was principal and how much was interest.

So if you want the loan account balance to be right, it takes some work.

1. Make your monthly payment in the full amount. That will reduce the loan amount by the full amount you paid.
2. When you get the next statement, find the amount of interest paid last month and …

2a. Bring up make journal entries
2b. Debit the loanshark-int-exp account by the amount of interest paid
2c. Credit the loanshark liability account by the amount of interest paid.
2d. Set the date of the journal entry to the date the last payment was made if you wish. (That keeps the journal entry and the payment entry together in the account quick reports.)

What happens is that you (as an example) made a $100.00 payment on a loan of $1,000.00
On 5 Mar you make the $100.00 payment and the loan balance is $900.00
On 5 Apr you get a new statement and find that $92.54 was interest
On 5 Apr you make the journal entry and add $92.54 (the credit entry) back to the loan balance, making the balance due $992.54 as it should be, and the interest expense account has the correct amount.