Xero user: How to record business loan?

pauldbaker95

Hi all,

If there are any users of Xero that can help with the below, I would appreciate it.

I am new to the business and trying to sort our balance sheet out to reflect the liabilities and assets clearly. Currently, we have a few business loans that were taken out before I joined to pay for things such as business insurance and fleet insurance.

My question is, how would I record this in Xero? Apparently, I can either do this by setting up a dummy bank account or as a liability account. My preference is to set it up as a liability as, to me, it is the most appropriate being an outstanding loan.

I have therefore setup a current liability account as this will be paid off within the next year. I think I would need to record a manual journal entry. The bit I am struggling with is the debit side. Usually if the business receives a loan, I think you would debit the bank for the money coming in and then credit the loan account to show the total liability owed. However, we never received the money in the bank account, the money was paid directly to the insurance company, and we are paying back the loan provider in monthly direct debit instalments. Therefore, I can't understand what account I should be debiting as we never received the asset of money, we effectively just paid off the expense. However, I don't think I should allocate the whole loan amount in one transaction, otherwise the accounts for that month won't be accurate.

If someone could help me with the initial recording of the loan in the accounts, I would be most grateful. I then guess the monthly repayments would be a credit to the bank account and a debit to the loan account to reduce the liability balance until it is paid off?

JRK77

Somebody more experienced than me may correct me, but I would suggest increasing the owner's equity (capital) and putting the other side to an expense (whatever the expense was that you paid for personally on behalf of the business).
I hope I've understood you correctly. Please say if not.

So for example, one journal could be:

Dr Insurance (because it's an expense)
Cr Capital (because it's money owed to you, as an owner of the business).


EDIT:

I've just spotted that the expenses were paid for by an external loan provider, not paid for by the owner on behalf of the business.
Apologies for that oversight - it's 2:30am!

Then I would suggest that the journal entry be, for example:

Dr Insurance (because it's an expense)
Cr Loan Payable (current liability)

and when you make the monthly repayments:

Dr Loan Payable (to reduce the liability)
Cr Bank (to reflect the bank payment - in Xero this will be done by use of the automatic bank feed).

pauldbaker95

JRK77 said:

Somebody more experienced than me may correct me, but I would suggest increasing the owner's equity (capital) and putting the other side to an expense (whatever the expense was that you paid for personally on behalf of the business).
I hope I've understood you correctly. Please say if not.

So for example, one journal could be:

Dr Insurance (because it's an expense)
Cr Capital (because it's money owed to you, as an owner of the business).


EDIT:

I've just spotted that the expenses were paid for by an external loan provider, not paid for by the owner on behalf of the business.
Apologies for that oversight - it's 2:30am!

Then I would suggest that the journal entry be, for example:

Dr Insurance (because it's an expense)
Cr Loan Payable (current liability)

and when you make the monthly repayments:

Dr Loan Payable (to reduce the liability)
Cr Bank (to reflect the bank payment - in Xero this will be done by use of the automatic bank feed).

Brilliant, thanks so much for this. And I forgive the 2AM error, grateful you have taken the time to reply!

Just something I wanted to clarify. If I debit the initial loan as an expense (to insurance) and credit it to loan payable, will this not show as one lump "payment" of an expense in one month, rather than being shown as a monthly expense over the loan term? I'm viewing it a little bit like an asset that is depreciated with depreciation charges as expenses each month to reflect the payment being in the correct month? Is that where the DR of the loan payable each month replaces this theory? I hope what I have written makes some form of sense!!

JRK77

Hi Paul,

Please excuse the delay in responding. Busy busy busy.

There may be a better way to do this in Xero - if any other user knows of a better way please do feel free to impart your knowledge.

Since you're paying the balance over a year, and you know how much you're paying every month, I wonder if the easiest way would be simply to create supplier accounts for the loan providers in Xero and input the monthly amounts as if they were supplier invoices.
They will sit on the reports as a monthly liability and when you pay the amount each month, you can allocate the payments to the appropriate monthly 'invoice' from the Xero bank feed.