Question

How to reduce loan balance against service provided in lieu of receiving cash?

Forum|Forum|1 year ago
September 20, 2024
2 replies
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I have a dilemma that need accounting experts help, my company is a cost center for another entity. We have received some loan roughly $300K from them at the beginning of last year. As of beginning of this year we still have balance of $150K of the loan as liability in our Balance Sheet (BS).

Now, we performed certain management services for them each month and we bill them against our work and receive cash against our bills. Pretty normal stuff!

In the last several months, we performed our services, however in lieu of billing them and receiving cash we want to reduce our loan balance against our management services performed.

So, if we do this right there would be no invoice and bills to change the P&L. We should apply for example $50K management service fee against the loan balance of $150K and the balance sheet should show the loan balance of $100K remaining.

But, if we reduce liability by $50K what account should we increase on either Asset or Equity to make BS is balanced?

QuickBooks Online

R

rvrfrf

Thanks for reaching out to the Community, MikeAm. I appreciate your detailed information.

To properly identify if you should apply a fee or reduce liabilities, and which accounts you should be using, I'd recommend working with an accounting professional.

If you're in need of one, there's an awesome tool on our website called Find a ProAdvisor. All ProAdvisors listed there are QuickBooks-certified and able to provide helpful insights for driving your business's success.

Here's how it works:

Go to our Find a ProAdvisor page.
Use the City or ZIP search field to specify a location.
Select Find a ProAdvisor.
Browse through your results and find one that works best for the business. You can click on each ProAdvisor's profile to learn more information about them.

Once you've found an accountant, they can be contacted through their Send a message form:

Use the available text box to introduce yourself. Be sure to include details about which services you're looking for.
Enter your appropriate info in the Your name, Your email, and Your phone number (optional) fields.
Select Send message.

Another option is checking out our QuickBooks Live Expert Assisted service. Our Expert Assisted team is always available to help with best practices and guidance on getting the most from your books.

Please don't hesitate to send a reply if there's any additional questions. Have a wonderful Friday!

Rainflurry

@MikeAm

"So, if we do this right there would be no invoice and bills to change the P&L."

That's incorrect. You need to report the $50K as income on your P&L.

We should apply for example $50K management service fee against the loan balance of $150K and the balance sheet should show the loan balance of $100K remaining.

"But, if we reduce liability by $50K what account should we increase on either Asset or Equity to make BS is balanced?

The $50K management fee is income and that is what offsets the reduction in the loan liability. The best way to record this is to create bank account in QB called 'Clearing Account'. Then, create an invoice for $50K to report the income. Receive "payment" on the invoice and deposit to the Clearing Account. Then, move the balance in the Clearing Account to reduce the loan payable balance by creating a journal entry: debit loan payable and credit Clearing Account for $50K.

M

MikeAmAuthor

Hi @Rainflurry

Let me explain a bit more, perhaps I was not very clear on my need. We are a cost center so originally this loan came from our mother company to get us going and start the business. At this time we have a balance of $150K as liability in our BS. We are still in business and providing management and service to our mother company each and every month. But, in recent months we have done extra services and management fee for them above and beyond our regular daily work. So we have two choices: 1) bill them additionally for these extra services and we would have revenue in our books and we will get A/R and eventually if any extra cash left in our books after paying taxes we can re-pay partial the loan balance. or 2) we do not bill them for extra services and management fee and record these additional services and values as either some sort of Asset or Equity in BS and off set our liability with the same amount. Can we do that?

Rainflurry

@MikeAm

It really doesn't matter if you record the offsetting liability reduction to revenue or an equity account (definitely not an asset) as long as it's easily identifiable on your financial statements and the parent company has a process in place to make sure those transactions are eliminated when the financial statements are consolidated.

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