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naylorconsulting
April 17, 2025
Question

Using a loan repayment to clear an invoice for my client (who is also my lender!)

  • April 17, 2025
  • 1 reply
  • 0 views

We have a US-based client who we work with very closely on a number of projects.

 

For a Canada-based project, we ended up taking the lead. We ended up borrowing from this client to cash-flow the up front costs. I recorded these amounts in a Liabilities account I set up specifically for the loan.

 

I have just issued an invoice to that client for services (unrelated to the project we took the loan for). Our client would normally transfer funds for this invoice right away. However, we agreed instead to simply take the invoiced amount off the loan -- basically using a loan repayment to cancel out the amount owed on this invoice.

 

Now I'm wondering how on earth I should reflect that in the books!? Do I set up a clearing account for this client/lender so I can put our loan repayment into their account and then use that amount to clear the invoice? This is what I'm inclined to do but I'm not sure if there's a better option.

Thanks for your help!

1 reply

S
SheandL
April 18, 2025

You can set up a clearing account and use a retainer item to achieve this, Naylor. I'd be glad to walk you through these options properly.

 

Firstly, you will need to set up a clearing account. This will serve as a temporary holding area for funds during transactions before they are allocated to their final destination. Once done, make an expense transaction. To do so, please follow the steps below:

 

1.Select + New. Then select Expense.

2. Add the necessary information and select the clearing account in the Payment account dropdown.

3. Once done, navigate to the Category details dropdown, then add the following:

- The first line item should be the liability account where the loan amount is deposited.

- If you accrued an interest, you can add its amount on the second line.

- Lastly, add the A/R account of your USD client. This will allow you to convert the amount to a stored client credit which can be later linked to an invoice.

4. Once done, click Save and Close.

 

For reference, please see the screenshot below:

 

 

To close your invoice successfully, you can do this by navigating to the Receive Payment section. Please follow the steps below to complete this.

 

  1. Go to the + New button, then select Receive payments.
  2. Choose the appropriate customer.
  3. Tick the open invoice and the expense you've made. This way, you can link the invoice to the credit from the expense.
  4. Click Save and close.

 

Alternatively, you can achieve this by recording a journal entry that decreases the loan balance and transfers the amount to a liability account, which can be utilized to monitor the advance payment effectively.

 

Afterward, create a retainer item and link its income account to the corresponding liability account. This way, you can add this item as a negative entry whenever you create an invoice.

 

Moreover, I still recommend reaching out to your accountant for more tailored advice and guidance that aligns with your specific accounting practices.

 

Furthermore, if you want to accept upfront payments for products and services, I'll provide this article for guidance: Manage upfront deposits or retainers.

 

If you have other questions or concerns about this process, feel free to get back to us, Naylor. We'll be here to help you anytime.

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