Loans, clearing and suspense accounts, and reconciling the balance sheet
You'll split loan payments into principal and interest, keep clearing and suspense accounts at zero, prove every balance sheet account and fix errors the right way.
- Principles:
- Full disclosure
- Consistency
Loans: principal and interest
A loan payment has two parts. Principal pays down what you owe, a liability. Interest is the cost of borrowing, an expense. Only the interest is on the profit and loss.
An amortization schedule from the lender shows the split for every payment. Early payments are mostly interest, later ones mostly principal. The part due in the next 12 months is a current liability.
| Account | Debit (Dr) | Credit (Cr) |
|---|---|---|
| Loans Payable, Long-Term | $812.00 | |
| Interest Expense | $188.00 | |
| Business Checking | $1,000.00 | |
| Total Balanced | $1,000.00 | $1,000.00 |
Are you Increasing or Decreasing?
| Debit | Credit |
|---|---|
| Liability | Asset |
| Equity | Draw |
| Revenue | Expense |
− To decrease an account, put it on the opposite side.
Loans Payable, Long-Term goes down: press − and find Liability on the debit side.
Transfers and deposits
Moving money between your own accounts is a transfer: one account goes up, the other down, with no income or expense. A deposit of several checks shows on the statement as one amount, so group them in Undeposited Funds first and record one deposit that matches the bank.
| Account | Debit (Dr) | Credit (Cr) |
|---|---|---|
| Savings | $5,000.00 | |
| Business Checking | $5,000.00 | |
| Total Balanced | $5,000.00 | $5,000.00 |
Are you Increasing or Decreasing?
| Debit | Credit |
|---|---|
| Liability | Asset |
| Equity | Draw |
| Revenue | Expense |
− To decrease an account, put it on the opposite side.
Business Checking goes down: press − and find Asset on the credit side.
Clearing accounts
A clearing account holds money for a short time on its way somewhere, like Payments Clearing for card payments waiting to be paid out, or Undeposited Funds. When things are working, it goes back to zero (or close to it) after each payout or deposit. A balance that keeps growing means something wasn't matched.
Suspense accounts
A suspense account is a temporary home for something you can't classify yet. Use it rarely, write down why, and clear it before the month closes by moving each amount to the right account.
| Account | Debit (Dr) | Credit (Cr) |
|---|---|---|
| Suspense | $412.00 | |
| Accounts Receivable | $412.00 | |
| Total Balanced | $412.00 | $412.00 |
Are you Increasing or Decreasing?
| Debit | Credit |
|---|---|
| Liability | Asset |
| Equity | Draw |
| Revenue | Expense |
− To decrease an account, put it on the opposite side.
Accounts Receivable goes down: press − and find Asset on the credit side.
Reconcile every balance sheet account
The bank isn't the only account to prove. Every balance sheet account needs support: loans to the lender's statement, prepaid expenses to their schedule, payroll liabilities to what's owed, receivables and payables to their aging reports.
In Leah Books, Account reconciliations lists each balance sheet account, what it should equal and who signed off.
(opens the full-size screenshot)Fixing errors
Don't delete history from a reported period. Find the error, then post a correcting entry in the open month that moves the amount to the right account, with a memo saying what and why. If a closed month truly must change, reopen it with a reason, fix it, and lock it again.
Try it in Leah Books
- Go to Accountant > Manual journals and record a $1,000 loan payment: debit your loan account 812 and Interest Expense 188, credit your checking account 1,000. Add the loan account in Accountant > Chart of accounts first if you don't have one.
- Go to Accountant > Account reconciliations and look at the list of balance sheet accounts and their status.
- Open Reports > Balance sheet and find 1030 Payments Clearing and 1095 Undeposited Funds.
- Go to Accountant > Exception scan to see what it flags.
Key terms
- Principal
- The part of a loan payment that pays down what you owe.
- Interest
- The cost of borrowing money. An expense.
- Amortization schedule
- The lender's table splitting each payment into principal and interest.
- Clearing account
- A temporary account for money on its way to its final account.
- Suspense account
- A temporary home for amounts not yet classified. Clear it every month.
- Correcting entry
- An entry that fixes an error by moving amounts to the right accounts.
Check what you learned
Pick an answer to see if it's right and why. Nothing is saved or sent.