Deal Pack Blog
How do I account for a line of credit?
It’s a common misconception that a line of credit is to be recorded as a liability, whether or not the line has been used. However, whether your business uses the cash or accrual method of accounting, the method of recording line of credit transactions is the same. If the line of credit has not yet been used, it is unnecessary to record entries on your general ledger. Open lines of credit do not need to be reflected on your financial statements as it is not considered an asset for accounting purposes. General ledger entries should only been made when drawing on the line of credit, and making payments on the line of credit.
When using a line of credit, a line of credit account should exist in your chart. This account should be reflected as a liability.
The first activity that will touch your line of credit account will be the drawing of funds from the line. Using an example of a $5,000 draw from a line of credit, the entry will look as follows:
|Line of Credit||$5,000.00|
In the example, $5,000 is receipted into the bank account and is also setup as a liability. Now that you have drawn money from the line, the liability must be present on your Balance Sheet.
The only other activity that should affect the line of credit G/L account will be the payments made to pay down or payoff the liability. Often there will be interest and fees will be included in the curtailment payments. Consider an example where the total payment owed on the line is $300. Of that $300, $20 is interest and $10 are fees. The entry would look as follows:
|Line of Credit||$270.00|
In the example, $270 is the principal payment reducing the liability and the interest and fees are recorded with separate line items.
These simple entries will keep your financials complete and accurate!