Correct Categorizing: monthly loan payment

Does your business make car payments on a business vehicle? What about another loan with monthly payments to principal and interest? It is super common to miscategorize these monthly payments to an expense account like “Auto” or “Vehicle”. Actually the interest portion of the monthly payment is the only expense to your business. It should be categorized to an “interest Expense” account. The principal portion of the monthly payment is a repayment of the loan you received and isn’t an expense to your business. You do get to expense the depreciation of the asset to offset the income during the life of the asset.

You can go about categorzing loan payments a couple different ways in QuickBooks Online or other software you are using. One way is when you get the monthly bill in the mail or email, create a bill for it in QBO. Make sure to set the correct date of the bill and due date. Category line one is Note Payable (this assumes your full loan is on the books— I guess I need to write another post on that!) for the principal amount. Category line 2 is Interest Expense for the interest amount. Your bill will break down what part of that month’s payment is principal vs interest so you know what amounts to put for each. Then don’t forget to mark the bill as paid in QBO when you actually pay it or you can wait to match it when the payment comes in through your bank feed.

You can always check to make sure you did it right by going to your balance sheet report. Select dates that will include this bill. Look at the Note Payable in the Long Term Liabilities section. Click on the amount and it will show you the transaction report which should include your bill. Go to the P/L and look for Interest Expense within the same period. Again clicking on the amount will show your the transaction report with your bill in there. Congratulations, you are a bookkeeping rockstar!

Still have questions? Email me!