Question

Assigning expenses to liabilities account and owner's pay

Forum|Forum|2 years ago
September 28, 2023
1 reply
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I got a small business loan, which I recorded in the Chart of Accounts as a liability "Loan" with zero starting balance. Then I assigned the credit transaction imported from my bank, so it has money now.

I have 3 questions that I would appreciate some help with:

What's the correct way to assign expenses to this liability account? Right now, when I edit an expense imported from my bank I see I can assign it to the liability account, so it takes the money out. Is this the correct way?
If that's the correct way, then how can I keep track of expenses for other accounts? For example, I have "Insurance" account which tracks insurance payments. If I assign that expense to "Loan", then I won't know how much I spent on the insurance. Am I missing something?
And related, I pay myself every month and put it in "Owner's Pay" account. This is an expense, but it is also an income for me personally. And filing 1040 and Schedule C, they are intertwined. How would I keep track of it if I paid myself from the "Loan" account?

I know the basics, but this is going over my head a bit. Would appreciate someone clarify this for me.

Thank you for your time and help.

QuickBooks Online

Rainflurry

@Mysterious-Good540

"What's the correct way to assign expenses to this liability account? Right now, when I edit an expense imported from my bank I see I can assign it to the liability account, so it takes the money out. Is this the correct way?"

It depends. Is the payment coming from the loan account (the bank is paying for your expenses) and adding it to your loan balance? If so, then yes, you are doing it correctly. If you are paying the expenses from your checking account with funds from the loan, then the deposit of the funds should be assigned to your loan payable liability account and the expenses are paid from your checking account with a check, expense or bill payment.

"If that's the correct way, then how can I keep track of expenses for other accounts? For example, I have "Insurance" account which tracks insurance payments. If I assign that expense to "Loan", then I won't know how much I spent on the insurance. Am I missing something?"

Expense accounts are unrelated to where the funds come from to pay those expenses. They are two sides of the same entry in double-entry accounting. You can pay for expenses from your bank account, loan, credit card (also a loan) or any other way and as long as you assign the proper expense account to a transaction (check, expense, bill, etc.) you will see it on your P&L.

"And related, I pay myself every month and put it in "Owner's Pay" account. This is an expense, but it is also an income for me personally. And filing 1040 and Schedule C, they are intertwined. How would I keep track of it if I paid myself from the "Loan" account?"

If you don't have a CPA/tax accountant, you may want to get one. As a sole proprietor, you cannot pay yourself and record it as an expense. You need to pay yourself using your owner's equity account. You only need one owner's equity account called "Owner's Capital". Some people use Owner's Contributions for money/assets put into the business and Owner's Draw for money taken out. Any money/assets you put into the business as well as profits generated from the business are assigned to that account and any money you take out (pay yourself) should be assigned to that account and it should never go negative.

M

Mysterious-Good540Author

Thank you @Rainflurry for taking the time to answer. That's very helpful. I did have a CPA in the past, but the person disappeared so I'm trying to get a handle on it myself. It's not a huge business, so there are not many transactions to deal with. Just need to understand how.

The loan was deposited in the checking out and used from the checking account.

If you are paying the expenses from your checking account with funds from the loan, then the deposit of the funds should be assigned to your loan payable liability account and the expenses are paid from your checking account with a check, expense or bill payment.

If the money were always in the checking out, should there be a transaction (transfer?) from the liability account to the checking out in QBO?

As a sole proprietor, you cannot pay yourself and record it as an expense. You need to pay yourself using your owner's equity account. You only need one owner's equity account called "Owner's Capital".

I may not have worded it correctly. The "Owner's Pay" is an equity-type account. The payments are assigned to it. So I was just curious, if I wanted to assign my payment to a liability account, how would I keep it assigned to my "Owner's Pay" equity account?

Thanks a lot!

Rainflurry

@Mysterious-Good540

"If the money were always in the checking out, should there be a transaction (transfer?) from the liability account to the checking out in QBO?"

The initial deposit made to the checking account should be recorded as a deposit (New > bank deposit) and under ACCOUNT, select your loan payable liability account. That records the deposit into your checking account and a corresponding amount due on the loan.

"The "Owner's Pay" is an equity-type account. The payments are assigned to it. So I was just curious, if I wanted to assign my payment to a liability account, how would I keep it assigned to my "Owner's Pay" equity "account?

When you pay yourself and record it as a draw, that is a reduction in equity. You cannot have both a reduction in equity and a liability because both are credits in double-entry accounting. When you take money out of the business, it should be recorded as a reduction in equity.

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