Sticky Situations You May Not Know How to Handle Part 3

Sometimes, we have loans! And also... sometimes we don't know how to categorize them correctly in Quickbooks... Let's talk about how to do that correctly!

🧾 Scenario: You Make a Loan Payment

Let’s say you pay $1,000/month toward a business loan. Of that, $850 is principal and $150 is interest.

Many users incorrectly categorize the full $1,000 as an expense. But only the $150 interest should hit your Profit & Loss. The $850 reduces your loan balance on the Balance Sheet.

✅ Step-by-Step in QuickBooks Online

🔹 Step 1: Set Up the Loan Account (if not already done)

1. Go to Settings ⚙️ > Chart of Accounts.

2. Click New.

3. For Account Type, choose Liability (usually "Long-Term Liabilities").

4. For Detail Type, choose Notes Payable (or a similar loan option).

5. Name it something like “Business Loan – Bank of America”.

6. If you already have a loan balance, enter the opening balance (or let your accountant do this).

7. Click Save and Close.

🔹 Step 2: Record the Loan Payment Properly

1. Click + New > Expense or Check (depending on how the payment was made).

2. Select the Payee (e.g., Lender’s name).

3. Choose the Payment Account (e.g., your business checking account).

4. Enter the Payment Date and Payment Amount (e.g., $1,000).

5. In the Category Details section:

   CategoryAmountDescriptionLoan Liability Account (e.g., “Business Loan – BofA”)$850PrincipalInterest Expense (create this if needed)$150Interest

6. Add a memo (e.g., “Loan Payment for June – Principal & Interest”).

7. Click Save and Close.

✅ This separates principal from interest so your loan balance goes down and only the interest hits your Profit & Loss.

🔍 Common Mistakes to Avoid

• Don’t create a generic “Loan Payment” expense account—this leads to incorrect categorization.

• Don’t lump the full payment under Interest or any other Expense category.

• Review your lender’s amortization schedule monthly or quarterly to confirm the principal vs. interest split.

🎯 Pro Tip

Create a recurring transaction template if your loan payments are the same each month. This saves time and ensures consistency in how payments are categorized.