I have a convertible note that accrues 5% simple interest until a little over a year from now at which point it will be converted into equity. I would like to book the monthly interest expense in an accrued expenses or liabilities account, but there doesn't seem to be an accrued expenses or liabilities account detail type that shows on the balance sheet but not the statement of cash flows.
You can easily memorize a monthly bill for the interest. It is real, it is an expense every month under accrual reporting but will only be an expense when you pay it under cash accounting. If you were to retire the loan today you would pay principal plus interest. Any new liability will show on statement of cash flow which is essentially a report of where funds come from to keep you in business, including each and every increased liability.
I have 5 convertible notes which at this point they mature since the company raised more money. The initial entry a year ago was just a deposit going to convertible note. I'm sure I need to move it from Liability to equity and moving the original amount is easy but how do i account for the interest expense? The notes were not accruing interest, hence there is no record of that in QB but I have the calculation of the accrued expense. example of one note following:
I would use a journal entry for this. The interest is/was not due until the date of conversion so you do not have an ongoing interest expense - even accrual based - during the life of the lloan.
Debit Loan $5000
Debit Interest expense $126.03
Credit investor equity $5126.03
And I would , unless you have already, add a specific equity account for each investor to track from this point point forward their equity in your company, especially if it now affects the distribution of P&L
Thank you! this is very helpful and I appreciate it greatly. Re: your suggestion to create an equity account for each. I did't think it was necessary since I have the name of the investor under description and that's how I'm able to track it. Currently I have all 5 notes going to "convertible note" with the name of the investor in the description field. Is there something I'm missing?
No, you are not really missing anything as long as you somehow keep track of each investor's money. And although you can map accounts to lines on K-1 (for partners) you really cannot produce those forms in QB, it has to be done in alternate tax software. So as long as you know how much equity percentage each investor now has compared to yours the K1 distribution path is relatively simple for your CPA..
Example, say in 2019 you received $50k in convertible notes due in 2020. The net profit or loss for 2019 is 100% yours. But say that $50k converted (plus interest converted) now represents 10% (for a round number) of overall company equity - then 10% of your 1065 Partnership return is allocated to the investors whose notes converted into equity. Or maybe you didn't realize yet that you now have partners - and a partnership