How to Handle a Line of Credit Loan:

Zero Balance Line of Credit up to a Max Amount.

If you have not yet used your line of credit, no journal entry is necessary to your accounting ledger. You do not need to reflect an open line of credit on your financial statements. A “line of credit”  is not considered an asset for accounting purposes. In this aspect, a line of credit from a bank or other lender is no different than a business credit card where you do not record activity to the accounting general ledger until you use the card.

Recording a Line of Credit Draw

When you draw from your line of credit, you indicate the amount you need up to your line of credit limit and receive the funds by check, cash, or transfer into your business checking account. Even though you will use the line of credit funds to pay business expenses, the withdrawal itself does not represent a business expense. To accurately reflect the line of credit draw, record an increase to the checking account by the amount of funds drawn and an increase to the Line of Credit payable account for the amount drawn. Those accounts appear on the Balance Sheet report in the Assets and Liabilities sections.

For AGRIS, this means setting up a bank code, Ledger Account, & SJI Bank setup.

  BNK
   AGRIS > Bank > Bank Maintenance > Add Bank Code for Line of Credit
   This is a zero balance amount. it will stay zero until you draw on the line of credit.

 LDG
   AGRIS > LDG > Maintenance Options > Chart of Accounts > Insert
   Insert a liability account for Line-of-Credit Loan.

 SJI
   AGRIS > SJI > System Accounts > Bank > key in new bank code
   Point code to new ledger account

 AGRIS Process:

  when you draw on the loan,
  transfer dollars from the Line of Credit bank (creating a negative aka credit)  to the checking account.
  the balance that will post to the loan payable and you bank.

 Payments on the Line of Credit

Once you draw funds from your line of credit, you will receive a monthly statement requesting payment until the “line of credit” is paid down to zero. The statement will reflect the amount of interest due on the line of credit for the prior month's usage as well as the required minimum principle amount that must be paid toward the line of credit open balance. You have to pay at least the minimum principle amount required and the interest charges, but you can also pay more if you are able.

Record the entire payment to the line of credit lender as a decrease to the checking account. Record the interest charged as an increase to the Interest expense account and all principal amounts paid as a decrease to the Line of Credit payable account.

AGRIS Process:

  Transfer the principle payment amount from the checking account to the line-of-credit loan bank.
Key in the interest on the loan as a manual bank withdrawal coded to loan expense from the Checking Account Bank.