How to record a business loan in QuickBooks Online
Got a loan deposited into your business account? It’s tempting to treat it as income, but that’s a costly mistake. A loan is a liability, and the payments have two parts. Here’s how to record it correctly in QuickBooks Online.
First, a loan is not income
When a loan lands in your account, your cash goes up, but so does what you owe. It isn’t money you earned, so it should never appear as income on your Profit & Loss. Instead, it’s recorded as a liability, money the business owes and will pay back. Treating a loan as income inflates your profit and can leave you paying tax on money you have to repay.
The other key idea: payments have two parts
When you repay the loan, each payment splits into two pieces that are recorded differently. Getting this split right is what keeps your books accurate over the life of the loan.
Principal
The portion paying down what you borrowed. It lowers your loan balance and isn’t an expense.
Interest
The cost of borrowing. This part is an expense, and it’s usually tax-deductible.
Step by step
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Create a liability account for the loan
In your Chart of Accounts, add a new account. Set the type to Liability, a current liability for a short-term loan, or a long-term liability for one repaid over more than a year. Name it something clear like “SBA Loan” or “Equipment Loan.”
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Record the loan money coming in
Enter the deposit for the loan amount into the bank account where it landed, and categorize it to the new loan liability account, not to income. This shows the cash arriving and the matching debt in one step.
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Record each payment as a split
When you make a payment, split it: the principal portion goes against the loan liability account (reducing what you owe), and the interest portion goes to an interest expense account. Your lender’s statement or amortization schedule tells you how much of each payment is which.
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Check the loan balance over time
As you record payments, the liability account balance should steadily drop toward zero, matching what your lender says you still owe. If it drifts, a payment was likely recorded without the correct split.
Common mistakes to avoid
- Recording the loan as income. This overstates profit and can mean paying tax on borrowed money. It’s a liability, not revenue.
- Recording the whole payment as an expense. Only the interest is an expense. The principal reduces the loan balance, counting all of it as an expense overstates your costs.
- Guessing the principal/interest split. Use your lender’s amortization schedule. The split changes with every payment, so estimating throws off both the balance and your deductible interest.
Want a pro to check you’re doing this right?
Loans are one of the easier things to record wrong. If you’re keeping your own books but want an expert to set it up correctly or check your work, our bookkeeping consulting gives you one-on-one time with our Bookkeeping Manager, guidance without the cost of a full-time bookkeeper.
This guide is general information, not tax or accounting advice. Loan treatment can depend on your situation and structure. When in doubt, confirm with a professional.