A common business situation is to use a new loan to repay one or more existing loans, possibly raising cash in the process. This is commonly referred to as a refinancing.
QuickBooks includes a Loan Manager which can be run from the Banking->Loan Manager menu selection. It’s important to understand that Loan Manager is primarily a tool to calculate payment schedules and to simplify the process of distributing interest and principal payments to the appropriate GL accounts. When you create a new loan in Loan Manager, the outstanding balance for that loan will start as $0 – until you record a transaction in the liability account in QuickBooks itself. Once the liability account is increased to reflect the loan’s principal, Loan Manager can assist you to record the regular payments. Likewise, when you remove a loan from Loan Manager, you are not making changes to the liability account balance.
Therefore, the simplest way to account for a refinancing is to use GL journal entries. To make these functions, access the Make General Journal Entries window from the Company->Make General Journal Entries menu selection.
Let’s consider this example: a company is refinancing a building for $200,000, and is using the settlement proceeds to repay 3 other mortgage loans, pay the settlement expenses, and increase cash. Each of the 3 other mortgages has an outstanding balance of $50,000, and there are 2 settlement charges that total $4,000. That produces a net increase in cash of $46,000. Here are the conceptual debits and credits to record:
- Enter a credit of $200,000 to the new mortgage liability account
- Enter a debit of $46,000 to the cash or checking account in which the net proceeds were deposited
- Enter debits to the expense accounts to reflect the settlement charges; in our example, there are 2 debits to expense accounts, 1 for $3,000 and 1 for $1,000
- Enter debits of $50,000 to each of the 3 existing mortgage accounts that were paid off with the settlement proceeds
- When you’ve entered all your debits and credits, click either Save & Close or Save & New to save your work
Here’s another look at those debits and credits:
The order that these debits and credits are entered on the Make General Journal Entries window does not matter provided that total debits equal total credits.
Once you’ve recorded this general journal entry, you can now run Loan Manager and delete the 3 loans that were fully repaid and set up the loan payments for the new loan. Note that Loan Manager reads your GL chart of accounts when it loads, so if you’ve added any accounts while Loan Manager was already running to record the journal entries discussed, you’ll need to close and re-start Loan Manager before recording the new loan. It’s a good idea to have a separate account for each loan to simplify reconciling that account in the future, so the new loan should get a new account. The GL accounts must be active to be recognized by Loan Manager, so don’t make the GL accounts for the 3 paid-up loans inactive until after you’ve deleted them from Loan Manager.
The Account Name in Loan Manager is the liability account for the new loan, which in our example is “New mortgage liability account.” When you select this account from the pull down menu in Loan Manager, it will automatically recognize the principal balance that was created with the GL journal entries you recorded. Continue to set up the new loan and delete the repaid loans.
Once completed, your financial statements are correct, and you’re ready to use Loan Manager to calculate and distribute your loan amortization.