How to Record Personal Money Put Into Business in QuickBooks

Putting your own money into your business is a common practice, especially in the early stages. Recording this infusion of personal funds accurately in QuickBooks is crucial for maintaining a clear financial picture and ensuring your accounting is on point. The most straightforward method is to record the transaction as a contribution to owner’s equity or as a loan from the owner, depending on the nature of the transaction. Let’s break down each approach.

Understanding Owner’s Equity vs. Owner’s Loan

Before diving into the mechanics, it’s vital to understand the difference between contributing to owner’s equity and loaning money to your business.

Owner’s Equity Contribution

An owner’s equity contribution implies that you are permanently investing your money into the business. There is no expectation of repayment. This increases your ownership stake in the company.

Owner’s Loan

An owner’s loan, on the other hand, signifies that you expect the business to repay you at some point in the future, potentially with interest. This creates a liability for your business. The determination depends entirely on your specific intent.

Recording an Owner’s Equity Contribution in QuickBooks

Here’s how to record an owner’s equity contribution in QuickBooks:

1. Create an Owner’s Equity Account: If you don’t already have one, create a new account in the Chart of Accounts. Go to “Accounting” > “Chart of Accounts” > “New”. Choose “Equity” as the account type and select the subtype that best fits your situation, such as “Owner’s Equity”, “Partner’s Equity”, or “Retained Earnings” (if you’re not sure, “Owner’s Equity” is usually the best choice). Name the account clearly, such as “Owner Contribution“.
2. Create a Bank Deposit: Navigate to “+” > “Bank Deposit”.
3. Select the Bank Account: Choose the bank account where you deposited the personal funds.
4. Add Funds to This Deposit: In the “Add Funds to This Deposit” section, select the “Owner Contribution” equity account you created in step 1.
5. Enter the Details: Enter the date of the deposit, a description (e.g., “Owner’s Contribution – Initial Investment”), and the amount of money you deposited.
6. Save the Deposit: Click “Save and Close” or “Save and New”.

This transaction will increase both the bank account balance and the owner’s equity account balance, reflecting the investment in the business.

Recording an Owner’s Loan in QuickBooks

If you’re treating the money as a loan, follow these steps:

1. Create a Liability Account: Create a new account in the Chart of Accounts. Go to “Accounting” > “Chart of Accounts” > “New”. Choose “Liability” as the account type. For the subtype, select “Other Current Liabilities”. Name the account something descriptive like “Loan from Owner“.
2. Create a Bank Deposit: Navigate to “+” > “Bank Deposit”.
3. Select the Bank Account: Choose the bank account where you deposited the personal funds.
4. Add Funds to This Deposit: In the “Add Funds to This Deposit” section, select the “Loan from Owner” liability account you created in step 1.
5. Enter the Details: Enter the date of the deposit, a description (e.g., “Loan from Owner – Working Capital”), and the amount of money you deposited.
6. Save the Deposit: Click “Save and Close” or “Save and New”.

This transaction will increase the bank account balance and create a liability in the “Loan from Owner” account.

Recording Loan Repayments

When you repay the loan to yourself, you’ll record a payment from the business bank account to the “Loan from Owner” liability account.

1. Create an Expense or Check: Go to “+” > “Expense” or “+” > “Check”.
2. Select the Bank Account: Choose the bank account from which the repayment is made.
3. Choose the Payee: Enter your name as the payee.
4. Select the Category: In the Category details section, select the “Loan from Owner” liability account.
5. Enter the Amount: Enter the amount of the repayment.
6. Save the Transaction: Click “Save and Close” or “Save and New”.

This will decrease both the bank account balance and the liability account balance, reflecting the repayment of the loan.

Recording Interest Payments

If you’re charging interest on the loan, you’ll need to record both the principal repayment and the interest payment separately. Create an “Interest Expense” account in your Chart of Accounts and use that account when recording the interest portion of the payment.

Why Accurate Recording Matters

Accurate record-keeping is paramount for several reasons:

• Financial Transparency: It provides a clear and accurate picture of your business’s financial health.
• Tax Compliance: Proper documentation is essential for filing accurate tax returns.
• Business Valuation: Accurately tracking owner’s equity and loans helps determine the true value of your business.
• Investor Relations: If you seek external funding, potential investors will scrutinize your financial records.
• Profitability Analysis: Without a clear understanding of your business investments, you are unlikely to get a true picture of your profitability.

FAQs: Personal Money Put Into Business in QuickBooks

1. What if I used personal funds to directly pay for a business expense instead of depositing the money into the business bank account?

Instead of a bank deposit, record this as an “Owner Contribution” directly against the expense account. Go to “+” > “Expense”. Enter your name as the Payee. In the “Category” section, choose the specific expense account (e.g., “Office Supplies”) and enter the amount. In the “Payment account” field, instead of the bank account, choose the “Owner Contribution” equity account. This acknowledges that you personally covered the expense.

2. How do I correct a mistake if I accidentally recorded a contribution as a loan, or vice versa?

You can easily correct this by creating a journal entry. If you recorded it as a loan when it should have been equity, debit the “Loan from Owner” liability account and credit the “Owner Contribution” equity account. If you did the opposite, debit the “Owner Contribution” equity account and credit the “Loan from Owner” liability account. Always include a clear explanation in the journal entry’s description.

3. Should I keep track of all the personal money I’ve put into the business?

Absolutely! Tracking all personal investments is critical for understanding your financial stake in the business and for accurate tax reporting. Maintaining detailed records, including dates, amounts, and purposes, is highly recommended.

4. Does QuickBooks have a built-in feature for tracking owner’s contributions and loans?

QuickBooks doesn’t have a specifically designated “owner’s contribution” or “owner’s loan” feature, but using the correct account types (Equity and Liability) and clear descriptions accomplishes the same goal. You need to set them up manually as described above.

5. What if I want to charge interest on the loan I made to my business?

You can charge interest, but you must report it as interest income on your personal tax return. You should document the interest rate and repayment terms in a formal loan agreement to avoid potential issues with the IRS.

6. How do I account for the interest I’m paying on the loan to myself?

As mentioned, you need an “Interest Expense” account. When you make a payment, split it into two lines: one for the principal repayment (credited to the “Loan from Owner” account) and one for the interest payment (debited to the “Interest Expense” account).

7. Can I deduct the interest I pay to myself on the owner’s loan as a business expense?

Generally, yes, the business can deduct the interest paid to the owner on a bona fide loan, as long as it meets the IRS requirements for deductibility, including a reasonable interest rate and proper documentation.

8. What is the best way to document the agreement between myself and the business regarding the loan?

Create a formal loan agreement. This document should include the loan amount, interest rate, repayment schedule, and any other relevant terms. This agreement serves as evidence of the loan’s legitimacy.

9. How does recording owner’s equity contributions affect my taxes?

Owner’s equity contributions are not considered taxable income for the business. However, they do increase your basis in the business, which can affect capital gains taxes if you later sell the business.

10. How does recording owner’s loans affect my taxes?

Owner’s loans are not considered taxable income for the business, and repayments of the principal are not deductible expenses. However, as discussed, the business can deduct interest payments made to the owner (subject to IRS regulations).

11. Is it better to treat personal money as an owner’s contribution or a loan?

The decision depends on your financial goals. If you want a permanent investment in the business and don’t expect repayment, treat it as an owner’s contribution. If you expect repayment, potentially with interest, treat it as a loan. Consider the tax implications of each option as well.

12. What happens if I put personal assets (like a vehicle or equipment) into the business?

This is considered a non-cash contribution. You’ll need to determine the fair market value of the asset at the time of the contribution. Debit the appropriate asset account (e.g., “Vehicles” or “Equipment”) and credit the “Owner Contribution” equity account for the fair market value. This will get recorded in your chart of accounts as a transaction.