How to Record a Business Line of Credit in QuickBooks

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When I was a commercial loan officer, the line of credit was the easy part. The phone calls came later — from owners and their bookkeepers — asking the same question: how do I actually put this thing in QuickBooks? They’d drawn $15,000, made a couple of payments, and now their books didn’t balance and the bank balance didn’t match the software.

The confusion almost always comes from one mistake: treating a business line of credit like income or like a single expense. It’s neither. A line of credit is borrowed money you owe back — a liability — and each piece of it (the draw, the principal repayment, the interest) gets recorded differently.

This guide walks through the bookkeeping mechanics in plain English: setting up the liability account, recording a draw, recording a payment split between principal and interest, and reconciling the account so your books match the lender’s statement. The steps below describe the concepts and the general QuickBooks Online / QuickBooks Desktop flow. Menu labels move between versions and updates, so treat them as a map, not gospel — and confirm the exact account setup and tax treatment with your accountant.

First: a line of credit is a liability, not income

Start here, because everything else depends on it. When you draw on a line of credit, cash hits your bank account — but it is not revenue. You borrowed it; you owe it back. In bookkeeping terms it’s a liability.

That’s the single most common error I see: an owner sees money land in checking and books it as income (or just lets QuickBooks auto-categorize the deposit). Now their revenue is overstated, their books are wrong, and at tax time they may be paying tax on money they borrowed.

So the structure is:

• The amount you owe on the line = a liability account on your balance sheet.
• A draw (money in) = an increase to that liability and an increase to your bank balance. No income involved.
• A principal payment (money out) = a decrease to that liability and a decrease to your bank balance. Not an expense.
• The interest portion of a payment = an expense (interest expense). This is the only part that hits your profit and loss.

Hold onto that last distinction. The principal you repay is just giving back borrowed money — it doesn’t reduce your profit. The interest is the cost of borrowing, and that’s the expense. (For why a line accrues interest only on what you’ve drawn, see how interest works.)

Step 1 — Set up the line of credit as a liability account

You need a dedicated account so the line’s balance lives in one place and reconciles cleanly against the lender’s statement.

In QuickBooks Online:

1. Go to the Chart of Accounts (under Transactions, or via the gear/settings menu).
2. Choose New.
3. For Account Type, select a liability type. A revolving line is typically treated as a current liability (you can draw and repay it on an ongoing basis), but the right classification can depend on your terms — confirm current vs. long-term liability with your accountant.
4. Pick the matching detail type (for example, a “Line of Credit” or other current liability detail type, depending on what your version offers).
5. Name it something clear, like “Line of Credit — [Lender].”
6. Leave the opening balance at zero and add balances through transactions instead, unless your accountant tells you to enter an opening balance as of a specific date. Manually typed opening balances are a frequent source of reconciliation headaches.

In QuickBooks Desktop: the path runs through Lists → Chart of Accounts → Account → New, then choose a liability account type. The logic is the same — a dedicated liability account named for the lender.

If your line came with a one-time origination or setup fee, that’s generally booked as a financing/bank fee expense rather than part of the loan principal — but the exact treatment varies by accounting policy and entity, so ask your accountant how to book it for your situation.

Step 2 — Record a draw (borrowing from the line)

A draw is when you pull money from the line into your business bank account. Two things happen at once: your bank balance goes up, and what you owe on the line goes up by the same amount. Nothing here is income.

The cleanest way to record it in QuickBooks Online:

1. Use + New → Bank deposit (or Transfer, if you moved funds between two accounts QuickBooks already tracks).
2. Set the deposit into the bank account that received the cash.
3. In the category/account field for the deposit line, select your Line of Credit liability account — not an income account.
4. Enter the amount and save.

This records the cash coming in while increasing the liability, so your balance sheet shows you now owe more on the line. If the bank feed brings the deposit in automatically, categorize it to the Line of Credit liability account rather than accepting a default income/sales category.

A quick gut check: after recording a $15,000 draw, your checking should be $15,000 higher and your Line of Credit account should show $15,000 owed. If revenue moved, you booked it wrong — go back and re-categorize.

Step 3 — Record a payment (split principal vs. interest)

This is where most books go sideways, so take it slowly. When you make a payment on the line, your money usually covers two different things:

• Principal — paying back the money you borrowed. This reduces the liability. It is not an expense.
• Interest — the cost of borrowing. This is an expense (interest expense) and is the only part that hits your profit and loss.

A single payment almost always covers both, and you have to split it so each part lands in the right place. If you dump the whole payment against the liability, you’ll understate your interest expense (and potentially a deduction). If you dump it all to interest expense, your liability balance will never go down and won’t reconcile.

In QuickBooks Online, use Check or Expense to record the payment:

1. + New → Check (if you wrote/printed a check) or Expense (for an electronic/debit payment).
2. Choose the bank account the money came from.
3. In the Category details, add two lines:
   • Line 1: your Line of Credit liability account → the principal portion.
   • Line 2: an Interest Expense account → the interest portion.
4. The two lines should add up to the total payment. Save.

Where do you get the principal-vs-interest split? From the lender’s statement. Your monthly statement or online account shows how much of each payment went to interest and how much reduced the balance. Use those exact figures — don’t estimate. On a variable-rate line, the interest portion changes as the prime rate moves, so check each statement rather than assuming last month’s split.

If you set up the line as a vendor or use a register

Some bookkeepers prefer to record line activity directly in the account register for the liability, or to treat the lender as a vendor for payment tracking. Both can work. The non-negotiable rule is the same regardless of method: principal reduces the liability; interest is booked to interest expense. How you get there matters less than getting those two buckets right.

Step 4 — Reconcile the line of credit account

Reconciling means matching your QuickBooks records to the lender’s statement so the two agree. You reconcile a line of credit much like you reconcile a bank account — except you’re confirming a balance you owe, not a balance you have.

1. Get the lender’s statement for the period (ending balance, statement date, and the interest charged).
2. In QuickBooks Online, go to the reconcile tool (under the gear/settings menu → Reconcile), and select your Line of Credit account.
3. Enter the statement ending balance and ending date from the lender.
4. Check off each draw, payment, and interest charge in QuickBooks against the statement.
5. Aim for a difference of $0.00 when you’re done.

A few things that commonly throw the reconciliation off:

• Interest posted by the lender but not yet recorded in QuickBooks. If the lender charged interest you haven’t booked, add it as an interest expense entry so your records match.
• Timing differences — a draw or payment that cleared on a different date than you recorded.
• The principal/interest split being off, so the liability balance drifts from the statement over time. This is the big one. If your reconciliation is off by small, recurring amounts, suspect a mis-split payment.

If you reconcile every statement period, errors surface while they’re small and easy to trace. Let it slide for a year and you’re untangling twelve months of drift.

A note on the balance sheet and your P&L

When this is all set up correctly, here’s what you should see:

• Balance sheet: the Line of Credit appears as a liability, showing the current amount you owe. As you draw, it rises; as you pay principal, it falls.
• Profit & loss (income statement): only the interest shows up, as interest expense. Draws and principal payments never touch your P&L.

If your line of credit is somehow showing up as income, or your principal payments are reducing your profit, something is mis-categorized — revisit the steps above. And remember the interest may be tax-deductible as a business expense, which is exactly why splitting it out correctly matters; see our overview of whether interest is tax-deductible and confirm specifics with your tax pro. Whether and how much you can deduct depends on your situation, so treat this as general information and confirm with your tax professional.

Quick-reference: what goes where

Where each line-of-credit transaction lands in your books

Transaction	Bank account	Line of Credit (liability)	P&L impact
Draw (borrow)	Increases	Increases	None
Principal payment	Decreases	Decreases	None
Interest portion of payment	Decreases	No change	Interest expense
Origination / setup fee	Decreases	No change	Bank/finance fee expense (varies — confirm with accountant)
Lender interest charge (accrued)	No change (until paid)	May increase	Interest expense

Treat this as a general map. Your accountant may adjust the treatment for your entity type, accounting method (cash vs. accrual), and the line’s specific terms.

Before you record anything: confirm with your accountant

I’ll be blunt, because this is YMYL territory and your books drive your taxes. The mechanics above are the standard approach, but the right setup for your business depends on details a guide can’t see — your entity type, whether you’re on cash or accrual accounting, how your chart of accounts is already structured, and your line’s specific terms.

Have your accountant or bookkeeper confirm:

• the account type/classification (current vs. long-term liability),
• how to handle fees (origination, maintenance, draw fees),
• the interest-expense and deductibility treatment for your situation, and
• any opening balance entry if the line existed before you started tracking it.

Spending twenty minutes with a professional up front beats unwinding a year of mis-categorized transactions later. This guide is part of our business line of credit guides hub.

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Frequently asked questions

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By Marcus Delaney, former commercial loan officer. BizBee is informational and independent. We are not a lender, an accounting firm, or a tax advisor, and we do not broker loans. Some links are affiliate links — see How We Make Money.