Whether you have a loan through a bank or some other lending institution, or business credit card debt (even if it’s small, if you’re carrying any kind of balance, you’re accruing some fees and interest), you need to keep track of that debt in a certain way.
The two biggest things you need to know are:
1. You definitely need to record your loans on your books. If you’re in an accounting software, you’ll book it in a liability account, with it offsetting to an asset account. For example, if you get a loan to buy a piece of equipment, you’ll have two accounts in your chart of accounts: the loan account and the equipment account. If you get a Small Business Administration (SBA) loan that gives you a cash infusion, the loan is a liability account and your cash in your bank account is the asset (so you don’t need a separate account on your COA)
If you’re in a spreadsheet, you still need to keep track of the loans and any transactions against that loan. You could track your assets and loans in a separate tab in your spreadsheet, but your payments are going to need to go in with the rest of your transactions, and that leads me to:
2. You need to track the principal and interest portion separately. This *should* be easy to find, especially on your loan statement. Find the payment in your transaction summary, and it should show you the portion you paid toward the principle and the portion that went toward interest. Likely at the beginning of your loan, you will be paying more in interest than you are toward the principle, and I’m not going to lie, that’s going to hurt. But you’ll be okay. And burying your head in the sand about it isn’t going to make it go away!
If you’re in QBO, all you have to do is click on your loan payment in the bank feed and click Split payment. You’ll code the principle portion to the loan account, because that actually reduces the balance of the loan, and the interest portion to an Interest Expense account (if you don’t have one, create one). You want to keep track of that expense because interest is deductible – woo hoo! The principle payment is not deductible, because you are paying down the balance on an asset and building equity on it.
And if you’re in a spreadsheet, just add an extra line under the payment and do the same thing – one line is for the principle payment, which you categorize toward the loan, and one line is for the interest portion, and should be categorized to Interest Expense.