QuickBooks 2005: The Missing Manual

Managing Loans

Unless your business generates cash at an astonishingly fast rate, you'll probably have to borrow money to purchase big ticket items that you can't afford to do without, such as a deluxe cat-herder machine. The asset you purchase and the loan you assume are intimately linked—you couldn't obtain the equipment without the money you borrow.

But in QuickBooks, loans and the assets they help purchase aren't connected in any way. You create an asset account (page 37) to track the value of an asset that you buy. If you take out a loan to pay for that asset, you create a liability account to track the balance of what you owe on the loan. With each payment that you make on your loan, you pay off a little bit of the loan principal as well as a chunk of interest.

Note

On your company balance sheet, the value of your assets appears in the Assets section and the balance owed on loans shows up in the Liabilities section. The difference between the asset value and your loan balance is your equity. Suppose your cat-herder machine is in primo condition and worth $70,000 on the open market. If you owe $50,000 on the loan, your company has $20,000 in equity for that machine.

Most loans amortize your payoff, which means that each payment represents a different amount of interest and principal. In the beginning of a loan, amortized loan payments are mostly interest and very little principal, which is great for tax deductions. By the end, the payments are almost entirely principal. Making ...