How to Record a Promissory Note in QuickBooks Online and Desktop?

Recording a promissory note in QuickBooks is an essential step in maintaining correct financial records management.

A promissory note is a written promise to pay a certain amount of money at a later time. It is important to keep track of these promises appropriately so that your accounting system reflects the repayment schedule as well as the debt.

To guarantee correct tracking of the promissory note, the payee’s and the payer’s details must be accurately entered while entering a promissory note in QuickBooks.

You need to create a loan account by navigating to the Chart of Accounts to record a promissory note in QuickBooks Online, then record the initial amount and payments using the “Record Payment” option under Transactions. In QuickBooks Desktop, set up an account for the promissory note in the Chart of Accounts, close any unpaid invoices with the “Receive Payments” feature, and record loan payments using journal entries or sales receipts.

Understanding Promissory Note before Recording it in QuickBooks

Payee:

A Payee is referred to as a person or an organization to whom the payment is to be paid. The payee is qualified to receive the agreed amount mentioned in the promissory note. The payee is either paid by cash, check, direct debit, wire transfer , credit card or any other transfer medium.

Payer:

A Payer is referred to as a person or an organization to give the payee the agreed-upon amount of money. The payer accepts responsibility for the debt and agrees to pay the amount specified in the promissory note.

Terms of Payment:

A promissory note’s terms of payment specify the circumstances in which the payer consents to reimburse the payee. These conditions specify the total amount owed, the payment schedule, the due date, and any applicable interest rates.

1. Amount: The total amount that the payer and payee have agreed to exchange money for.
2. Interest Rate: The interest rate is the percentage of the principal amount that the borrower agrees to pay as interest over a specific period of time.
3. Payment Schedule: This specifies the frequency of payments (monthly, quarterly, etc.) as well as the amount of each payment.
4. Due Date: The deadline for full payment of the total amount.

Options to Record a Promissory Note in QuickBooks

• As a Payee: Loan receivable, and you become the creditor while payer becomes debtor
• As a Payer: Loan payable, and you become the debtor while the payee becomes creditor

On the Basis of Duration

• Less than 1 year: Current asset or current liabilities; Recorded as a Short term Loan
• More than 1 Year: Fixed Asset or Fixed Liabilities; Recorded as a Long term Loan

How to record promissory notes in a QuickBooks Desktop?

Record promissory notes in QuickBooks Desktop, set up accounts under Lists > Chart of Accounts, handle unpaid invoices in Customer > Receive Payments, and process payments via Banking.

To manage promissory notes in QuickBooks Desktop: Set up accounts via Lists > Chart of Accounts, choose Expense for receivables or Liability for loans. Close unpaid invoices by entering $0.00 in Receive Payments. Record loan payments using Make Deposits and Write Checks, then Save and Close.

Following the step-by-step information below:

As a Debt Receivable

Part 1: Setting Up the Necessary Accounts

To set up accounts, go to the Lists menu and select Chart of Accounts. Click Account > New, choose Expense, name the account, then click Save and Close.

Step 1: Navigate to the Chart of Accounts

• Click on the Lists menu on the screen.
• Click on the Chart of Accounts.

Step 2: Create a new account

• Click on the Account menu and then click on New.
• Select the account type by clicking on Expense and then hit Continue.
• Enter the account name.
• Click on Save and close.

Part 2: Close out unpaid invoices

To close unpaid invoices, go to Customer > Receive Payments. Enter $0.00 as the payment amount, apply discounts, select the relevant account, and click Save and Close.

Step 1: Navigate to the Open Receive Payments

• Click on the customer’s menu on the screen.
• Now, click on receive payments.
• Put the customer’s name in the Received from field.

Step 2: Mention the payment amount and discount

• In the payment amount, put $0.00.
• Now, choose the Discounts and Credits option on the screen.
• Enter the Amount you would like to write off in the “Amount of Discount” field.
• For  Discount Account, select the account you added in step 1, and select  Done.

Step 3: Save the transaction

• Once you are satisfied, Click on Save and close.

As a Loan Receivable

Part 1: Creating the Loan Account

Create a loan account, go to Lists > Chart of Accounts, click New, select Other Current Liability or Long-term Liability, name the account, then Save & Close. Set up the vendor and expense account similarly.

Step 1: Navigate to the Chart of Accounts

• Click on the Lists menu at the top of the screen.
• Choose the Chart of Accounts option.

Step 2: Make a new account

• Right-click on the screen and then click on New.
• Now, choose the account type for your loan:

1. Other Current Liability: For short-term loans payable over one year
2. Long-term Liability: For long-term loans payable over one year.

• Click on Continue.
• Mention the name and number of the account.
• Click on Save & close.

Step 3: Set up the Vendor

• Click on the Vendors menu, then choose Vendor Center.
• Click on New Vendor.
• Put the name of the bank or the company you need to pay for the loan.
• Click on OK.

Step 4: Set up an expense account

• Click on the Lists menu, then choose Chart of Accounts.
• Right-click anywhere, then choose New.
• Click on Expense, then hit Continue.
• Put the account name for the interest payments or fees.
• Press on Save & Close.

Part 2: Recording Loan Payments

To record loan payments, go to Banking > Make Deposits, choose the liability account, and enter the amount. Then, go to Banking > Write Checks, select the bank, and record payments for both principal and interest. Save and close.

Step 1: Navigate to the Make a Deposit window

• Click on the Banking menu on the screen.
• Choose Make Deposits.
• If the  Payments to Deposit window opens, click on Cancel.

• If the Make Deposits window opens directly, then:

1. In the Deposit To field, click the account to deposit the loan into.
2. Check the Date and enter an optional Memo.
3. In the From Account column, choose the Liability account you created in Step 1.
4. In the Amount column, put the loan amount.
5. Press on Save & Close.

Step 2: Record the loan payment

• Click on the Banking menu, then click on Write Checks.
• Choose the Bank Account you want to use to pay the loan.
• Verify the Date and check no.
• In the Pay to the Order field, choose the name of the bank.

• In the Expenses tab:
  1. On the first line, select the liability account you created in Step 1. Then, enter the payment for the principal amount.
  2. On the second line, select the interest expense account. Then, enter the payment for the loan interest.

Step 3: Save the transaction

• Once you are satisfied, Click on Save and close.

How to record promissory notes in QuickBooks Online?

Record promissory notes as a debt receivable in QuickBooks Online, first create a loan account by checking ageing receivables, then set up a Bad Debts Expense account. Record payments by applying credit notes, running a Bad Debts Report, and updating customer names. For loan receivables, set up a liability account, and record amounts with the Unpaid Balance field left blank.

Following the step-by-step information follow:

As a Debt Receivable

Part 1: Create the Loan Account

To create a loan account, first check ageing receivables by running the Accounts Receivable Ageing Detail report. Then, create a Bad Debts Expense account and item under Settings > Chart of Accounts and Products & Services.

Step 1: Check Your Ageing Accounts Receivable

• Click on the Reports option.
• Locate and open the Accounts Receivable Ageing Detail report.
• Check which outstanding accounts receivable should be written off.

Step 2: Create a Bad Debts Expense Account

•  Click on Settings and choose the Chart of Accounts.
•  Choose New to create a new account.
• From the  Account Type drop-down, choose Expenses.
• From the  Detail Type drop-down, choose  Bad Debts.
•  Press Save and Close.

Step 3: Create a Bad Debt Item

•  Click on Settings  (gear icon) and select  Products & Services.
•  Choose New and then Non-inventory.
• In the  Name  field, enter “Bad Debts.”
•  From the  Income Account drop-down, choose  Bad Debts.
•  Press Save and Close.

Part 2: Recording Loan Payments

To record loan payments, go to + New > Receive Payment, select the customer, apply the credit note to the invoice, and save. Then, run a Bad Debts Report and update customer names to reflect “Bad Debt” or “No Credit.”

Step 1: Apply the Credit Note to the Invoice

•  Click on + New.
•  Under  Customers, choose Receive Payment.
•  From the Customer drop down, choose the appropriate customer.
•  From the Outstanding Transactions section, choose the Invoice.
• From the  Credits section, choose the credit note.
• Press Save and Close.

Step 2: Run a Bad Debts Report

•  Click on Settings and choose the Chart of Accounts.
•  In the  Action column of the bad debts account, choose Run Report.
•  Add a Note to Bad Debt Customers Go to  Sales and select  Customers.
•  Choose the customer’s name.
•  At the upper right, click on Edit.
•  In the  Display Name field, put “Bad Debt” or “No Credit” after the customer name.
•   Click on Save.

As a Loan Receivable

Part 1: Setting Up a Liability Account

To set up a liability account, go to the Gear icon > Chart of Accounts. Click New, select Current Assets, then choose either Other Current Liabilities or Long Term Liabilities. Name the account and add details.

Step 1: Navigate to the Chart of Accounts

• Go to the Gear icon on the screen.
• Click on Chart of Accounts.

Step 2: Create a new account

• Click on the “New” option on the screen.
• Choose the Current Assets option from the drop down menu.
• In the Account dialog, choose either Other Current Liabilities or Long Term Liabilities from the Account Type drop down list.
• In the Detail Type drop-down list, choose either Other Current Liabilities or Long Term Liabilities.

Step 3: Name the account

• Enter the name of the account. [You can also provide a description and any necessary details.]

Part 2: Recording the amount

When recording the amount, leave the Unpaid Balance field blank. Review the details and click Save and Close to complete the transaction.

Step 1: Keep the unpaid balance section blank

• Leave the Unpaid Balance field blank.

Step 2: Save the transaction

• Once you are satisfied, Click on Save and close.

Conclusion

By properly recording the promissory note, businesses can monitor loans and their repayment schedules. This procedure makes sure that all loan transactions are transparently recorded and readily available within QuickBooks, which helps to maintain clear financial records by making it easier to manage and report on finances.

Disclaimer: The information outlined above for “How to Record a Promissory Note in QuickBooks Online and Desktop?” is applicable to all supported versions, including QuickBooks Desktop Pro, Premier, Accountant, and Enterprise. It is designed to work with operating systems such as Windows 7, 10, and 11, as well as macOS.