17 Nov Ask the Expert – Line of Credit
Ask the Expert – Line of Credit
Q – How do I handle a Line of Credit? Is it an asset account or a liability account, or both? Submitted by Jim
A – The short answer is that according to GAAP (Generally Accepted Accounting Principles) it should be an “Other Current Liability” type account since it is money that is owed and will become due within 1 year. From a practical standpoint, however, there are several different ways it could be handled in QuickBooks. Below are the alternatives along with the GAAP implications:
Money is drawn from the Line of Credit as Bank Overdraft protection – in this case the account should be an “Other Current Liability” type account which will be used on the deposit slip to record the money transferred into the bank account. This account, like all other balance sheet accounts, can then be reconciled when the statement arrives.
Purchases are made using a credit card associated with the Line of Credit – in this case following typical “Credit Card” type account procedures will be the most efficient. The line of credit can then be used as payment of a bill, individual credit card charges can be entered, or the account can be used on a deposit slip if a cash advance is recorded to the bank account. This process complies with GAAP since the credit card type account is a liability.
Line of Credit checks are issued as payment for goods and services – This would be the only time that the Line of Credit should be set up as a “Bank” type of account. To comply with GAAP at the end of the period the amount should be reclassified to a liability type account (and then subsequently reversed).