How do I charge interest on long-term loans to a customer?

Hi Mirm6476,

Even though this loan is to a customer, the postings should not hit your Account receivable account (I am assuming that you are not in the money lending business)

Please see entries below:

Loan given to customer - 9,000:

DR Long term loan account (balance sheet long term liability a/c)

CR Bank or cash

In QB, you can use check writing option or bank register

To record interest accrued on the loan, you can post this as a monthly journal entry.

DR Interest income receivable (balance sheet asset a/c)

CR Interest Income (P&L a/c)

When you recieve repayment, you need to split this into 2

(1) Return of capital portion

(2) Interest portion

Return of capital

DR cash

CR Long term loan a/c (balalce sheet)

Interest portion

DR cash

CR Interest income receivable (balance sheet asset a/c)

You can use the bank register for these 2 entries.

Hope this helps!

I frequently make short-term loans to my clients. Money lending is 1/2 of my business. the other is financial and business leadership counseling.

OK. For the financial and leadership counseling part of your business, i presume you're sending invoices and receiving payments, there using the Account Receivable account as normal.

For the money lending part, if the loans are all short term loans like you mentioned, ie less than one year, I would set up a "Loan to Customer" balance sheet account. This will be a current asset account - same category as Account Receivable.

Replace this account with the long term loan account I mentioned on my earlier email. All other entries remain the same.

It is best if you use this account for the money lending side of your business rather than AR, otherwise you will end up spending time contantly reconciling your A/R account.

Hope this helps!

I am working on a very similar transaction.  The info from fgfcca is helpful but I have one more question.

I am trying to keep a running balance in the Customer records of the total amount owed whether a payment is made or not.  Therefore, even though interest is being added to the loan balance monthly, I am not receiving all of it because several payments have not been made.  So, in my Interest Income account for this loan receivable, I show all of the interest charged, meaning all of it is income to me.  What type of entry do I make to back out from Interest Income account the amount I did not really receive?

Thanks.

Sue