As an accounting major in college, I quickly learned all of the complicated parts of the accounting cycle. I discovered how to input the details of business transactions into a computerized accounting system. At the end of an accounting cycle, such as a month, I became experienced with calculating the revenue for the period. If you’re starting a new business, determining an accurate amount of revenue for each accounting cycle is crucial. You must know how much profit you’re making each accounting period in order to be successful in the long-term. On this blog, you will discover how an experienced accountant can help you keep track of your revenue.
Small business loans are a vital part of getting your new business up and running and making sure it can grow as much as possible. This means, though, that you must understand how to handle the accounting aspects of the loan to ensure it's paid on time, stated accurately on your financial statements, and doesn't drag on your budget. Here's what you need to know to accomplish this.
How Is the Loan Recorded on Your Books?
A loan basically has two parts: an infusion of cash to the business and a promise to pay back the amount. This is recorded on your books as an increase to cash for the amount you're given to spend on the business and a long- or short-term liability for the amount you must repay (known as the principal of the loan).
In addition, if the loan is amortized, a portion of the interest is charged at regular intervals. This interest is added separately from the principal and is a current expense due rather than a long-term liability. Most businesses keep track of this interest in an account called "interest payable."
How Are Payments Recorded on Your Books?
Now that the liabilities are added, how do you keep track of payments? Generally, the bookkeeping of a payment has two parts. The first part takes the interest recorded as payable and records it as paid. Then, the portion of the payment that goes toward principal is subtracted from the liability for the loan. A corresponding amount of cash is used to offset these numbers as the payment leaves your bank.
How Does the Loan Leave Your Books?
All these pieces of the puzzle add up over time. Interest is recorded as a current cost, which usually makes it deductible on your income taxes as a business expense. Using this account also helps you be certain that the payment is forecasted in your budget and that it has been made on time.
And as each payment is deducted from the principal, it is less of a negative on your financial statements each month. When the last payment is made, the remaining liability will automatically clear from the books.
Where Can You Learn More?
Certainly, this multipart process can be confusing to new business owners who haven't dealt with accounting before. Failure to set up your loan correctly from the beginning can result in incorrect financial statements and make correct payments difficult.
Start by meeting with a reputable accountant in your area to learn more about handling your small business loan the right way. While it may take some extra work, it will help your business be the best it can be.
For more information, contact an accounting service.
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