Properly recording a loan

Just looking for some insight on how to properly record a line of credit loan used to buy fixed assets for my business. I have made a new liability account under chart of accounts, and I have created the new assets under fixed assets, but I’m not sure how to sync it all together. My line of credit used for the purchase was never deposited into the business because it is a personal line of credit.

First, a line of credit is not a loan until you draw upon it.

Second, it’s only a business loan if the funds are deposited into a business account. Since this LOC was personal, this is not a loan to be recorded in your business records. Proceeds of the line of credit which you use to purchase business assets are effectively a contribution of capital. You could enter them via an expense claim, because you have used personal funds for business expenses.

Third, tax and accounting rules probably require you to depreciate the fixed assets over time, taking each year’s depreciation as a current expense. That will be independent, though, of paying for the assets.

Because you bought the fixed assets with personal funds, another way to handle their entry into Manager’s records is with a journal entry as conversion of the asset from personal to business use. Debit Fixed assets and credit Owner's equity.

As you go forward, you will be paying off a personal loan, not retiring a business loan. There will not be a business accounting entry with each payment. So you will lose the benefit of any deduction for business interest. One way to get around that shortcoming may be to make a personal loan to the company. You should discuss this with an accountant knowledgeable about local tax law in your jurisdiction.

Thank you for your response Tut. I will follow what you have suggested and also ask my accountant about this as well.