Businesses often use a new loan with better terms to pay off one or more existing loans that carry higher interest rates. When you do so, your business must decrease or eliminate the value of old loans and identify any extraneous expense payments when recording a refinance in your accounting books.
Review your accounting records to ensure your initial loan was recorded correctly. When you initially took out a loan to pay for your business property, it should have been entered into the accounting system as a debit to cash and a credit to a loan liability account. For example, a $100,000 loan should be initially recorded as a $100,000 debit to cash and a $100,000 credit to business property loan liability.
Along with the initial loan journal entry, make sure that and subsequent loan payments were recorded correctly. Any loan payments should have been recorded as a split debit to the loan value and interest expense. If interest expense wasn't recognized, your old loan value in your books won't match your lender statements. For example, a $1,010 payment that paid down $1,000 of principal and $10 of interest should be recorded as a $1,000 debit to the loan liability account, a $10 debit to interest expense and a $1,010 credit to cash.
Once you've secured a refinance, create a liability account to reflect the new business property loan. Identify exactly how the business used the proceeds of the new loan. For instance, say that your company received $11,000 from its new loan. You used $9,000 to pay off the balance of the old loan and $300 for settlement expenses, and you retained $1,700 in cash. The accountant would debit the old business loan for $9,000 to zero out the balance. Next, the account debits a settlement expense account for $300, debits cash for $1,700 and credits the new business property loan account for $11,000.
Evaluate any changes in payments and expenses related to the new loan. Depending on the specific situation, the refinance may change the property valuation, property taxes, monthly mortgage payment and private mortgage insurance payment. You don't need to change any of your past journal entries for these payments, but you do need to make sure they're accurate going forward. If you have any memorized journal entries related to these payments, change them in the month you acquire the refinance loan to ensure the accuracy of your records.