This article addresses the bookkeeping maintenance of a typical cash loan, mortgage or line of credit account. It does NOT address the maintenance of credit card accounts.

Updating and reconciling a loan account is just as important as maintaining your bank and credit card accounts in your bookkeeping records.

I say this because so many businesses these days rely on the continuous funding from outside credit sources to help fund business operations and investments into fixed assets. It is imperative that both the principal balance and your interest paid year-to-date are kept up to date so you can fully understand:

  • Your total interest expenses: This can sometimes have an overwhelming effect on your overhead and thus skew your true cost of operations if not continuously monitored.
  • Your updated principal balance: It is always helpful to know your true debt obligations and decide whether or not you want to increase this balance or just halt the financing.

There are two simple ways to maintain the bookkeeping for a typical loan account:

  1. After you book the initial loan, then on a monthly basis: Book the total sum payment (principal + interest (do not split)) to the loan account. You will then need to make a 2nd entry to book the separate interest portion of that payment:
    1. Credit to the loan account and the corresponding debit to the interest expense account.

 

  1. The 2nd way is, after you book the initial loan, then on a monthly basis: Book the total payment (principal + interest), BUT, this time split this total sum payment into two pieces: the principal portion will go directly to the loan account (to reduce it) and the 2nd portion will go to an interest expense account (to increase this account).

Sometimes lines of credit account statements can be confusing because they can have two closing balances stated. One balance is for the principal amount and the other balance is for the payoff amount. You will need to take this choice into consideration and decide, for the long term, which balance you want to always reconcile to. Since a payoff balance may include interest that has NOT been officially charged to your account yet, then reconciling to this balance may be misleading because you are recognizing interest that has, on paper, not officially been recognized for 1099 or 1098 purposes (because you have not paid it yet).

 

Note: AccuraBooks is a bookkeeping firm only, so please consult with your Certified Public Accountant or with a Certified Auditor for verification and clarification about the contents of this article.

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