How to Record a Line of Credit in QuickBooks Online

A business line of credit is a powerful tool for managing cash flow, but its flexibility can make it a challenge to track accurately in your accounting software. Unlike a traditional loan with a fixed repayment schedule, a line of credit’s balance goes up with each draw and down with each payment. This guide provides a clear, step-by-step process for setting up and managing a line of credit in QuickBooks Online to ensure your financial reports are always accurate.

Start with the Right Account Setup in Your Chart of Accounts

Before you can record any draws or payments, you need to create a dedicated account for the line of credit. The type of account you choose is important for proper financial reporting. A line of credit is a debt your company owes, so it must be recorded as a liability, not a bank account.

Setting it up incorrectly as a bank account can interfere with bank feeds and reconciliations, and misclassifying it can skew key financial metrics on your balance sheet.

How to Create the Line of Credit Account:

• Step 1: Navigate to the Chart of Accounts. In the left-hand menu, select Accounting, then Chart of Accounts. Click the green New button in the top-right corner.
• Step 2: Define the Account Type. In the Account setup window, choose Other Current Liability for the Save account under field. This is appropriate for lines of credit that you expect to pay off within one year. If the line of credit has a term longer than a year, you could classify it as a Long-Term Liability.
• Step 3: Select the Detail Type. For the Tax form section, use the Detail Type dropdown to select Line of Credit. This helps QuickBooks map the liability correctly for reporting purposes.
• Step 4: Name the Account. Give the account a clear and specific Name, such as "Bank XYZ Line of Credit ending in 4567." This makes it easy to identify when recording transactions. Do not enter an opening balance; the balance will grow as you draw funds.
• Step 5: Save and Close. Once the details are entered, click Save. You now have a liability account on your Chart of Accounts ready to track your line of credit activity.

Recording Draws From Your Line of Credit

When you draw funds from a line of credit and deposit them into your business checking account, you are increasing your cash and, simultaneously, a liability. The simplest way to record this transfer of funds in QuickBooks Online is with the "Transfer" tool.

Example Scenario: Transferring Funds to Checking

Let's say you draw $15,000 from your line of credit, and the funds are deposited directly into your primary checking account.

How to Record a Draw Using the Transfer Tool:

• Step 1: Access the Transfer Tool. Click the + New button in the top-left corner and select Transfer under the "Other" column.
• Step 2: Specify the "From" Account. In the Transfer Funds From dropdown menu, select the line of credit liability account you just created (e.g., "Bank XYZ Line of Credit"). This step is crucial; you are telling QuickBooks the source of the funds is the debt instrument.
• Step 3: Specify the "To" Account. In the Transfer Funds To dropdown, select your business checking account where the funds were deposited.
• Step 4: Enter the Details. Enter the amount of the draw ($15,000 in this case) in the Transfer Amount field and verify the Date is correct. Add a memo for your records, such as "Draw for Q2 working capital."
• Step 5: Save the Transaction. Click Save and close.

By using the transfer tool, QuickBooks handles the double-entry accounting automatically. It records a debit to your checking account (increasing cash) and a credit to your LOC liability account (increasing the amount you owe).

Accounting for Purchases Made Directly with the LOC

Sometimes, you might use your line of credit to pay a vendor or purchase an asset directly without the cash ever passing through your checking account. For these situations, a journal entry provides the clearest and most accurate record.

Example Scenario: Direct Purchase of Equipment

Imagine your company buys a new server for $5,000, paying for it directly from the line of credit.

How to Record a Direct Purchase with a Journal Entry:

• Step 1: Open the Journal Entry Form. Click the + New button and select Journal Entry.
• Step 2: Enter the Date and Details. Set the date of the purchase.
• Step 3: Record the Debit. On the first line, select the appropriate account reflecting what you bought. Since it's a significant piece of equipment, you would typically use an asset account like Machinery and Equipment. Enter $5,000 in the Debits column. (Note: if the purchase was for a routine business cost, you would debit an expense account like "Supplies" or "Repairs and Maintenance.")
• Step 4: Record the Credit. On the second line, select your line of credit liability account. This is the source of the funds for the purchase. Enter $5,000 in the Credits column. The total debits and credits must be equal.
• Step 5: Add a Memo. In the description field for both lines, write a clear memo, such as "Purchase of Dell server model XYZ using LOC." This documentation is invaluable for future review by you or your CPA.
• Step 6: Save and close.

Recording and Accruing Interest

Your lender will charge interest on the outstanding balance of your line of credit. This interest is a business expense that also increases the total liability you owe. Most lenders add the accrued interest to the principal balance monthly. You should record this with a journal entry as soon as you receive your monthly statement.

Example Scenario: Monthly Interest Charge

Your monthly statement shows a $125 interest charge for the previous month.

How to Record Interest Expense:

• Step 1: Create a New Journal Entry. Click + New and select Journal Entry.
• Step 2: Use the Statement Date. Set the date of the journal entry to the last day of the statement period.
• Step 3: Debit Interest Expense. On the first line, select your Interest Expense account. Enter $125 in the Debits column.
• Step 4: Credit the Line of Credit. On the second line, select your line of credit liability account. Enter $125 in the Credits column.
• Step 5: Save the transaction.

This entry correctly records the expense on your Profit and Loss statement for the period and increases the balance of your LOC liability account on the Balance Sheet, ensuring both financial statements are accurate.

Making Payments on Your Line of Credit

When you make a payment from your checking account to your line of credit, you are decreasing your cash and decreasing your liability. The best way to record this in QuickBooks is by creating a check or expense transaction.

Example Scenario: Making a Monthly Payment

You make a $1,000 payment from your business checking account toward your line of credit.

How to Record a Payment:

• Step 1: Choose the Right Transaction Type. Click + New and select either Check or Expense. Use Check if paying with a physical check; use Expense if making an electronic payment (EFT/ACH). The accounting treatment is the same.
• Step 2: Fill Out Payment Details. Select the lender as the Payee and choose your business checking account as the Payment account. Enter the correct payment date.
• Step 3: Assign the Category. This is the key step. In the Category details section below, select your line of credit liability account as the Category. Do not categorize this payment as an expense. The expense was already recorded when you accrued interest or purchased goods.
• Step 4: Enter the Amount. In the Amount field, enter $1,000.
• Step 5: Save and close.

This transaction will reduce the balance in your checking account and, correctly, reduce the outstanding balance of your line of credit liability.

Final Step: Reconcile Your Line of Credit Monthly

Just like a bank account or credit card, you should reconcile your line of credit account in QuickBooks at the end of each month. This process involves comparing the transactions in QuickBooks to the transactions on your lender's monthly statement to confirm everything—draws, payments, direct purchases, and interest—has been recorded correctly.

To do this, go to Accounting > Reconcile, select your LOC account, and enter the ending balance and date from your statement. Check off all matching transactions. The difference should be zero. This final check gives you confidence that your liability balance is precisely what you owe and your financial records are audit-ready.

Final Thoughts

Correctly setting up a line of credit as a liability and consistently using Transfers, Journal Entries, and Checks/Expenses is key to maintaining accurate books. Following these steps ensures your Balance Sheet and Profit and Loss statements reflect the true financial position of your business.

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