Quickbook Strategies for Notes etc.

[David Hite]

Hey everyone!

I have purchased my first note, and it is about to be boarded. Once I start getting payments, I am wondering about everyone's strategy for how to track the note within my LLC's quickbooks company file.

  My CPA recommended creating a new equity account as the value of the discounted note price. Then as I get payments, I apply the principle portion decreasing the value of that equity account, and placing the interest income into "interest earned" under income.

  What strategies are people using to track these accurately and with minimal headache with book keeping?

Thank you!

Dave

[Bill B.]

@David Hite

I’ve only done three notes, so beware.  

Also, I’m using Quicken instead of Quickbooks.  I can’t imagine they are too different.  

I book the notes as assets, not equity.....but......while my thirty plus year old degree was in accounting, I’m not a CPA.  

There are a couple of things to consider.

Do you own the note outright, or do you have one or more investors?  If you have investors, I’d suggest starting a separate and distinct QB file for each note.  This allows you to back up and share the file for that particular note with your investors quite easily.  It you book all your notes into one QB file, you have to generate reports that pull out a specific note.  That can be far more time consuming....and mistakes can reveal information that can cause myriad problems.  

Related to that last point and true whether you use one or more QB files, I create a unique category for each note.

Because I have ZERO creativity, I use the address of the collateral securing the address as the category.  e.g. 123 Somewhere, Metroplis, XX.

The accounts then appear after the category.  That is true for all revenue and expense accounts.  If you keep all your assets (notes) in one QB file, you can run reports based on the category.  This allows you to isolate the single note to easily determine profit or loss.

Separate QB files may have to be consolidated for tax purposes, but that should be far less frequently than reporting to JV partners.

That’s my “solution”

I hope it helps.

[David Hite]

Thank you Bill, I will definitely use the asset category.  I never though to put the a separate expense/income sub categories under them, I was going to do it to the general QB file, as long as I tie them to the correct tax line, then we should be good.

  The note is individually owned, so no worries on that yet.  If I get into partials etc....then I'll cross that bridge when I need too!

Thanks

Dave

[Bob Malecki]

Hi Dave, QuickBooks lets you set up classes which are away to contain each asset and its own separate "container". This way you can run a p&l on each asset independently from the others if you need to and track your income and expenses using the class function

[Chad U.]

Originally posted by @Bill B.:

@David Hite

I’ve only done three notes, so beware.  

Also, I’m using Quicken instead of Quickbooks.  I can’t imagine they are too different.  

I book the notes as assets, not equity.....but......while my thirty plus year old degree was in accounting, I’m not a CPA.  

There are a couple of things to consider.

Do you own the note outright, or do you have one or more investors?  If you have investors, I’d suggest starting a separate and distinct QB file for each note.  This allows you to back up and share the file for that particular note with your investors quite easily.  It you book all your notes into one QB file, you have to generate reports that pull out a specific note.  That can be far more time consuming....and mistakes can reveal information that can cause myriad problems.  

Related to that last point and true whether you use one or more QB files, I create a unique category for each note.

Because I have ZERO creativity, I use the address of the collateral securing the address as the category.  e.g. 123 Somewhere, Metroplis, XX.

The accounts then appear after the category.  That is true for all revenue and expense accounts.  If you keep all your assets (notes) in one QB file, you can run reports based on the category.  This allows you to isolate the single note to easily determine profit or loss.

Separate QB files may have to be consolidated for tax purposes, but that should be far less frequently than reporting to JV partners.

That’s my “solution”

I hope it helps.

We use a different software, but setup the same way. The UPB is the asset which is diminished monthly by the principle, and interest is classified as income. There's also an expense which is categorized under the same name (as Bill points out above, we just use the address). We can then run reports from the GL account which gives the value asset (UPB), total interest, total prinicple paid and associated expenses.

For any JV investors, we classify that as a Liability and treat similar to a loan. Any payments that are split, the principle portion paid out to the investor draws down the Liability.

Hope that helps.  

[Marco Bario]

I only own a few notes and started with the entry level version of QuickBooks Online which I got an introductory deal on @ $7/mo. @Bob Malecki mentioned classes, which my version doesn't offer - but I can upgrade later without too much pain thanks to the workflow I'm using. 

Starting out I only knew enough about bookkeeping and QBO to be dangerous, so I enlisted a CPA firm run by Veronica Wasek (https://www.quickbooksonlineexpert.com/) who is rated as a top QuickBook advisor. After understanding my specific needs and those specific to notes, plus doing their own research with people in their network, they created my Chart of Accounts and most importantly workflows starting with costs incurred during diligence and going through various outcomes for an asset. I don't get money for referrals but I did tell Veronica I'd refer others her way if I was happy with the outcome, and I am. 

Good luck...

[Basit Siddiqi]

@David Hite

Congratulations on purchasing the note!

Your initial balance sheet should look something like this

Asset
Note receivable - $10,000
Equity
David Hite - $10,000

When you get the payments from the debtor - you will record a portion of the payment as payback of principal and a portion as interest

Cash - $100
     Interest income - $10
     Note Receivable - $90

There can be an additional layer of complexity if you factor in the account "discount on note receivable" but the above is a good starting point.

[David Hite]

For the discount on the purchase price: I was thinking to just set the asset value as the UPB% price that I paid. Ie $9,000 in your example if I paid 90% UPB. That 9,000 on an amortization schedule for the remainder of the term will then give me a P and I amount like you said above. This should take into account the interest earned and the discount amount as income and become taxable.

  Does this setup make sense and work?