I bought office equipment with a loan (or hire purchase); how do I record it in QuickBooks?
Purchase Order
After meticulously adding office equipment fixed assets to the chart of accounts, a crucial step in the process, I proceeded to the next step. I clicked the +New button on the left-hand corner of QuickBooks Online and selected the purchase order feature from the menu. In the purchase order form, I selected Just Copier, my supplier, and entered the date; I chose office equipment from the category details, entered $30,000 into the amount field, and selected the 9% GST rate. This selection was crucial as it determines the tax calculation. I let the systems calculate my tax [$2,700]—Save and Send.
Advances (a.k.a. Downpayment or deposit)
I received an order confirmation from Just Copier. However, my supplier told me there would be a delay due to a logistical issue. The order acceptance came with the condition that I must pay 30% in advance, which was $10,000. I signed off the confirmation and later received an invoice from Just Copier for the advance payment [$10,000] and a 9% GST of $900. This deposit was a common practice in business transactions, as it ensured that the buyer was serious about the purchase and helped the seller cover initial costs, which I understood. But why must I pay GST for the advances?
Compliance with regulations was necessary; I consulted the IRAS e-Tax Guide, GST Guide for Retailers (Fifth Edition), 11.1—if the deposit forms part of the payment for the selling price, the seller must account for GST on the deposit; this was a new learning for me. Therefore, I must pay $10,900 advances, including 9% GST.
I encountered a challenge when I launched my web browser, logged in to QuickBooks Online (QBO) with my credentials, and entered the six-digit two-step verification code I received via my mobile phone. I added a new bill from the +New button, selected Just Copier supplier, and entered the bill date. Under the category details, I searched the account dropdown list to look for my advances account but found none; this was where the ‘advances paid to the supplier’ account came into play. It’s a current asset account I must create to track the money I’ve paid in advance for goods or services. Therefore, I clicked the +Add New hyperlink, the first option in the account dropdown list, to add the advances account. I named the current asset account ‘advances paid to the supplier’ and saved it, using it for my bill. I entered $10,000 into the amount field and selected the 9% GST rate. I clicked the +New button again, selected the Pay Bill option, and paid the bill soon after I wired the advances to Just Copier. Then, I sent my application to the finance company to finance my remaining $20,000 purchase of office equipment.
I was thrilled to receive approval from the finance company; they gave me a finance package for the $20,000 loan with a 5% interest rate for three years—a significant achievement in my financial planning.
And waited, waited, and waited; waited for my equipment to arrive.
Bill – Goods received
I received the equipment, the delivery order, and the bills separately from Just Copier. I logged into QuickBooks Online, found the purchase order in the expenses navigator, and chose the ‘copy to bill’ option from the action dropdown list—it opened up a bill with my purchase order details. I added the advances paid to the supplier account to the second row of the category details, entered a negative $10,000 with a GST of $900 to reduce the amount owing, and cleared the advances ledger. I chose the term loan—a non-current liabilities account—in the last row of the category details and entered a negative $20,000, with an out-of-scope GST rate, since I was taking out a loan for the remaining. The bill showed an outstanding $1,800—the GST I must pay.
Interest in suspense
The finance company’s loan schedule estimated the interest for the three years at $1,579.04. I recorded a journal entry to debit the interest in suspense, a current asset account, and credit the term loan. My term loan ledger has a balance of $21,576.63, up from $20,000.
Reclassification
Another critical step in this process was reclassifying the loan repayment amount. I added a term loan (current) account to the chart of accounts. I recorded a journal entry to reclassify the current year’s loan repayment [$7,193.04] amount from long-term to current—debiting term loan account and crediting term loan (current). Reclassification was essential for accurate financial reporting; the accountant has to correctly reflect the current year’s obligations in the financial statement.
I opened a new tab on my web browser, logged into my bank, and scrolled through the current month’s transactions. The finance company had deducted the first repayment, $599.42. I returned to my QuickBooks Online, clicked the +New button and selected the Cheque [or Expenses if you preferred] from the menu. After choosing the finance company from the payee field and entering the deduction date, I searched for the term loan (current) account from the category details, got it, and entered the $599.42 into the amount field. I proceeded to the second row of the category details section, selected the interest in suspense and entered a negative $83.33 to reduce the ledger balance, my obligations. In the third row, I used the interest expense account to reclassify $83.33 from the interest in suspense to the interest expense account, which was the interest expense incurred for the month.
Above is a story about an accounting process that most bookkeepers, accountants, or business owners may encounter:
- Buying assets.
- Making a downpayment.
- Arranging a loan or hire purchase.
- Entering the monthly repayment.
It could be buying office equipment, factory machinery, motor vehicles, or property. The process is similar whether you are using QuickBooks Desktop, QuickBooks Online, or other accounting software. The interest calculation and repayment amount are assumptions; please refer to the loan repayment schedule given by your finance company. This blog post could clarify doubts about recording a loan or hire purchase; consult your accountant if you need help.