Line of Credit...How to set up and post

[geraldbr]

We recentely received a $15,000 line of Credit with a local bank. Obviously, this should be treated as a Liability. Our banker transfered a portion of the line ($10,000) into our checking account, from which we wrote a check to make a purchase.

Here is how we've set this up (is this the correct way, or is there a better way?)

We entered the deposit as we would a normal deposit (debit checking account, credit an income account) since the money was deposited into our checking account.

We also set up a liability account (Bank Line of Credit). In order to set the start balance for the Line of Credit in this, do we use a single entry (OOB) as a credit to the Line of Credit liability? Or is there a better way?

When payments are made to pay down the liability, I presume we credit the checking account and debit the Liability account.

Again, is this the best way to handle this, or is there a better way?
Thanks!

Gerald
Dallas Baptist Church

[Matt]

Although you received a $15,000 line of credit, you should only record a liability for the amount you have actually drawn against the line. Accordingly, when the banker transferred the $10,000 to your checking account, you should have recorded an accounting entry similar to the following:

Debit Checking Account 10,000
Credit Liabilities - Bank Line of Credit 10,000

The transfer was not income, so you should reverse the entry you made and then re-record the entry as shown above.

Then, as you make payments to pay down the liability, the payments will need to be split into the amounts for principal and interest. For example, if the payment is $500 and $425 is principal and $75 is interest the payment should be recorded as follows:

Debit Liabilities - Bank Line of Credit $425
Debit Interest Expense $75
Credit Checking Account $500

[geraldbr]

Matt:
Thanks!

That makes sense. Will reverse and re-record as you suggested.

Have a great day!
Gerald