If a business needs periodic loans for the purchase of assets or to cover shortages in operating capital, a line of credit is a good way of obtaining short or long-term financing without having to constantly go through the lending process. Once established, a business line of credit can be used whenever a business is in need of the funds as long as the reason for the lending request is within the scope of the original lending agreement. A line of credit does not need to be recorded in a company’s accounting records until the business borrows money against the line of credit.
Set up a general ledger account called Line of Credit Payable in the liabilities section of the general ledger.
Set up a general ledger account called Interest Expense in the expense section of the general ledger.
Record funding on the line of credit as an increase to the checking account in which the loan funds were deposited. An increase to a checking account on the general ledger is a debit.
Record the amount of the funding in the Line of Credit Payable account to reflect the liability now due to the lender. An increase to a payables account is a credit.
Record expenditure of the funds from the line of credit as you would any other business expense.
If you are not certain how to properly set up and record line of credit activity, consider hiring an accounting professional to assist you.
- Principles of Accounting; A. Douglas Hillman, Richard F. Kochanek, Corine T. Norgaard; 1991