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Level 1

How do you account for a loan without throwing off Opening Balance Equity?

-To start, our Opening Balance Equity was Zero.

 

-We took out a loan at the bank for $30,000. 

 

-I took the cash from the bank and deposited it into our Cash (Other Current Asset) account.  Then we spent that cash asset on equipment.  That cash account is now zero.

 

-I also created a loan account (Other current liabilities).  In doing so it was credited $30,000 while the Opening Balance Equity was debited $30,000.

 

-As we have paid down the loan, the "Opening Balance Equity" has continued to show -$30,000 on our balance sheet.  However, from what I'm reading, the "Opening Balance Equity" account should not show a balance if things are done correctly. 

 

My question is, did I do everything right?  If not, how do I fix it?

4 Comments
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Level 15

How do you account for a loan without throwing off Opening Balance Equity?

it's Real Equity; it didn't need to ever be "Opening Balance" Equity, because it is a Known issue, already, and is Real Equity. Don't use OBE ever; once the file is set up, that should be 0 if it ever got used in the first place, which you can Avoid.

 

You seem to have made a New Account and also Given it a Value.

 

You "made a loan" by entering a value out of Thin Air = you created that $30,000 out of Nothing. What you really have in Something in Real life. that's what you overlooked. Example:

You bought $45,000 Equipment' You took $15,000 from Checking and signed a loan for $30,000.

 

What your data should show is New Fixed Asset with a Cost Basis of $45,000. One portion is from Checking and one portion is From Loan. There is no OBE here.

 

For new banking, it's the same: never put an opening Balance when making the new account. Make the new account. Then enter your first deposit entry. Now you controlled the data flow.

 

So, did you forget about the Asset side of this activity?

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Level 1

How do you account for a loan without throwing off Opening Balance Equity?

First of all, I want to say, I am not an accountant so you will have to excuse my termanology.  Doing these transactions is among many duties I have at a relatively small employer, but I want to do it right.  I THINK I understand what you're telling me but I'm unsure how to actually execute these things in Quickbooks.  

 

So I should not have created the OBE, I understand why now. Got that!

 

To answer your last question first:  Yes, I did forget about the asset side of this activity for the equipment.  So, then should I do/have done the following:

 

1. Debit $30,000 to Assets and Credit 30,000 to the new Loan account (with a Journal Transaction).  So this $30,000 in the loan account is then reduced to zero as I pay off the loan leaving us with a $30,000 asset.  Do I have that correct?

 

2. Meanwhile, did I get the cash stuff correct?  We got the cash from the bank to buy the equipment so all I did was put it into a cash asset account and spend from there to reduce it?  Was that correct?

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Level 15

How do you account for a loan without throwing off Opening Balance Equity?

1. Right now, you need to zero out OBE and it seems this is your missing Fixed Asset basis, along with whatever else you did with any Actual Funds you spent yourself, such as the downpayment.

 

This was backwards: "We got the cash from the bank to buy the equipment so all I did was put it into a cash asset account and spend from there to reduce it?  Was that correct?"

 

The Banking deposit of the Loan Proceeds is where the Loan Balance comes from. Then, you Buy the asset, which is the Fixed Asset basis, + there might be expense, such as a new vehicle would have annual registration as expense.

 

Taking the Loan = the Debt.

 

Spending Money from banking = acquiring the asset.

 

You really did a lot of unnecessary tasks, and now are just running data in circles to get it to the right places.

 

Step 1: deposit borrowed funds = Liability balance.

Step 2, now, it's Your Money. This is the same as your Debt Payment topic. It's all in your bank, now. It's your Money, now. Spending it is just Entering the purchase details.

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Level 10

How do you account for a loan without throwing off Opening Balance Equity?


@Sean McC wrote:

 

 

-I also created a loan account (Other current liabilities).  In doing so it was credited $30,000 while the Opening Balance Equity was debited $30,000.

 

 

Go to the the loan account register and delete the first entry to OBE. This was created when you entered a balance in the account set-up, which should never be done except when setting up  a new set of books

 

 

 

-I took the cash from the bank and deposited it into our Cash (Other Current Asset) account.  Then we spent that cash asset on equipment.  That cash account is now zero.

 

If you received the money from the lender and deposited into your actual bank account, then the Bank Deposit transaction s/be to the actual bank account, and allocate it to the loan account.  Then for the payment to the vendor allocate it to Fixed Assets.

 

If the lender paid the vendor directly, then delete the Bank Deposit transaction, and create a journal entry: debit Fixed Assets, credit the loan account

 

 

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