If someone wants to forgive part of a loan (note) and convert it to a donation, how should I record this transaction?

I'd be glad to show you the way how we can manage this transaction in QuickBooks, @sameer-peera.

When the loan is forgiven, we can treat it as an income. We can set up an Income account to record this event in the system accordingly. Here’s how:

1. Go to the Gear account and then select Chart of Accounts.
2. Click New.
3. In the Account Type ▼ dropdown menu, choose Income account.
4. Select the detail type that best fits the transaction you want to track.
5. Provide a name, then add a description.
6. If you’re adding a sub-account, select Is sub-account and then enter the parent account.
7. Choose when you want to start tracking the money from the dropdown.
8. Press Save and Close.
   

You can use this reference in case you need more information about adding accounts, detail types, and opening balances.

After, you'll want to create a Journal Entry (JE) to debit the loan (Liability account) and to credit donation (income).

To track the loan history and the original amount, you can run a report for your Liability account to view them. I’ll show you how:

1. Go to the Accounting menu then Chart of Accounts.
2. Locate the Liability account.
3. Click the dropdown arrow beside the View register.
4. Select Run report.
   
5. Filter and hit Customize to display the needed details.

Through these processes, your books will be accurate. In case you have other concerns, please let me know. I’ll be here to guide you.

Thanks @MadelynC . The issue I'm having is that the Journal entry doesn't allow me to link the transaction to a specific individual. For example, I have two lenders:

• Lender A loaned $5000
• Lender B loaned $6000

Total Notes Payable is $11,000. 

Lender A decides to convert $3,000 leaving a balance of $2000 ($5000 - $3000). 

I issue a sales receipt for Lender A in the amount of $3,000 against an income account.

When I create a journal entry to account for this adjustment between the income and notes account, I can't specify the specific loan that I need to credit - the adjustment is at the category level (Notes Payable) and not the individual and/or business. Notes Payable will have a balance owed of $8,000 ($11,000 - $3,000) but I don't have a way to know the adjustment against a specific lender.

Is there a way to capture the loan adjustment at the Lender level (Lender A)? 

Glad to see you again, @sameer-peera.

Allow me to share some information when creating a Journal Entry about the loan transaction in QuickBooks Online.

When converting the loan note to a donation, there's no need to create a sales receipt as it will record another deposit separately. You only need to create a Journal entry in transferring the liability balance to an income account. I'd also recommend consulting your accountant about this matter. They will assess the transaction and give advice on what is the best thing to do.

Regarding creating a Journal Entry, here's how:

1. Go to the + New and select Journal Entry.
2. Enter the details below:
   • Liability Account= Debit
   • ​​​​​Income Account = Credit
3. Choose the specific Lender under the Name column.
4. Select Save and close.

Also, the option to track loan adjustment at a lender level is by creating a separate liability account for Lender A and Lender B.

You can track the transactions happening in your Loan account by running a Balance Sheet report or Account List report. I've added an article in case you've encountered an error when running a balance sheet in the future: FAQ: Basic troubleshooting for balance sheets.

I'll be here if you have other questions. You can always tag my name in the comment section. Have a wonderful day.