The way a loan is tracked depends on what type of loan you are tracking. There are two types of loans you can track:
- Line of Credit: Which is a bank account that you can freely take money in and out of
- Fixed Loan: Which is where the entire loan amount is deposited into your bank and then you repay the loan on a set time frame (like once a month)
In both cases you will need to track recurring interest payments.
Creating and tracking a line of credit
Three are three parts to working with a line of credit:
- Creating a new account
- Putting money into and out of the account
- Making interest payments
1. Set up a new line of credit account
Go to the Accounts page.
Create a new account named Line of Credit with the Type set as Bank.
2. Transfer money into and out of the line of credit account
Go to the Journal Entries page and Enter Transfer.
To take money out, enter the Date, Amount, and use the Line of Credit account for Withdraw From and Bank Account for Deposit into.
To put money in, enter the Date, Amount, and use the Bank Account account for Withdraw From and Line of Credit for Deposit into.
3. Enter interest payments using the Expenses page
Go to the Income and Expenses page and select Enter Expense
For the Paid from account, choose where the interest payments accrue (sometimes this is your bank account, sometimes this is your line of credit account). For the Category use the Bank and Interest Charges account.
Creating and tracking a fixed loan
There are three parts to working with a fixed loan:
- Create a new account
- Depositing the loan amount into your bank account
- Recording the loan payments (both the principal and interest)
1. Set up a new bank account
Go to the Accounts page.
Create a new account named Bank Loan with the Type set as Other Current Liability (for loans to be paid within a year) or Long Term Liability (for loans to be paid over the course of more than a year).
2. Transfer the money from your loan account to your bank account
Go to the Journal Entry page and select Enter Transfer
Use the Bank Loan account as the Withdraw From and your Bank Account as the Deposit Into account.
Note: To see your loan account you may need to select Show All Accounts
3. Enter Interest Payments
There are two ways to handle interest payments.
Method 1 - Enter the interest as a second line item when entering expenses.
Go to the Income and Expenses page and select Enter Expense.
For the Paid From account, choose your Bank Account. and for the Category you will need to have two line items. For the first line item select the Bank Loan account to pay back the principal. For the second line item select the Bank & Interest Charges Expense account to pay the interest.
Method 2 - Enter the interest as on a quarterly or annual basis using the transfers page
This involves first recording the principal and interest payment into a bank loan liability account and then moving the interest payments from the bank loan account to the interest expense account. Both of these transactions will be done using the Journal Entry page under Enter Transfer
Credit the Bank Loan account with the entire payment (which would include the principal plus interest).
- Withdraw From: Bank Account
- Deposit Into: Bank Loan
At the end of the year (or quarter) compare the balance to what the bank says you owe and transfer the difference to your interest expense account.
- Withdraw From: Bank Loan
- Deposit Into: Bank Charges & Interest Expense