Covid-19 Bookkeeping Part 1: How to Properly Record PPP Loans and Spending

This article discusses how to post PPP Loan income and expenses into accounting software, if opening a separate bank account for the PPP funds received.

Apr 21st 2020
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For this article, I have teamed up with my colleague Diana Cohn of Corner Office to detail ways to book income and expenses related to the Paycheck Protection Program, or PPP loan, from the SBA. This article does not go into detail about who is eligible or how to apply for these funds.

Instead, we will focus on entries to make in accounting software once you have received the PPP loan disbursement and started spending the funds. All examples use QuickBooks as the accounting software, so modify accordingly if you or your clients use a different program.

PPP Loan Income Setup – When Opening a Separate Account

From what we hear, some accountants and advisors are suggesting businesses open a separate bank account (in real life, at their bank) for Covid-19 funds received. A separate bank account is more audit-friendly, avoids co-mingling of funds, and creates a clear audit trail.

However, right now we’re hearing it is difficult to open a new bank account, with long lines and wait times, and there may be certain costs with opening a new Business Checking account (bank may require you to order some checks). Still, this post assumes that you are able to open a separate bank account for PPP funds. Now we’ll cover what to do in QuickBooks.

Setup the Loan Account

This loan will be a Liability (not free Income) until you determine how much of the loan will be forgiven. As such, you need to create a loan Liability account on the Chart of Accounts.

Use your judgement to determine if this is an “Other Current Liability” (usually repaid in less than a year), or a “Long Term Liability” account; we recommend the latter.

For QB Desktop: Chart of Accounts | (Ctrl+N) | Other Account Types | Other Current Liability OR Long Term Liability | Continue

Account Name: PPP Funds | Save & Close

For QB Online: Accounting | Chart of Accounts | New | Account Type: Other Current Liability OR Long Term Liability | Detail Type: Loan Payable OR Other Long Term Liabilities

Account Name: PPP Funds | Save & Close

Create a PPP Bank Account

For QBD: Chart of Accounts | (Ctrl+N) | Bank | Continue

Account Name: PPP Bank

For QBO: Accounting | Chart of Accounts | New | Account Type: Bank | Detail Type: Checking

Name: PPP Bank

Record the PPP Loan Income

1. Setup Loan Vendor

Verify you have a Vendor setup already for the name of the lending institution who processed your loan. If this lender is new to your business, setup the new Vendor.

2. Deposit Loan Funds

Make a Deposit to your new PPP Bank. Do this if you are using QBD or QBO; don’t wait for the bank feed – manually enter the deposit so it will be a QBO Match.

Received From: Enter the Vendor name of your lender from step 1 above

From Account: Enter the new Other Current Liability or Long Term Liability Account you created above

Memo or Description: To record receipt of PPP Funds

Be sure to enter the correct deposit date and deposit amount.

Create a New Vendor in QB

If you are a regular reader of my Blog posts, you will know I’m not fond of the QB “Transfer” feature. Instead, I suggest you write a check to record transfers between bank accounts. To do this, setup a new Vendor, if you don’t already have one in place.

For QBD: Vendors | Vendor Center | (Ctrl+N)

Vendor Name: Transfer to Bus Checking -xxxx

Where the -xxxx is the last 4 digits of the business checking account number.

For QBO: Expenses | Vendors | New Vendor | Company (and Display Name as) Transfer to Bus Checking -xxxx

Where the -xxxx is the last 4 digits of the business checking account number.

Recording Expenses

Use the regular Business Checking account to pay expenses as per normal. But after payment of each expense, make a transfer (using the Write Check feature) from your PPP Bank back to your regular business checking account as reimbursement for the allowable expense. Move the funds in real life, and in QB.

For example: If you pay a utility bill during the covered period for $84.92 from your regular business checking, then make a transfer from your PPP Bank to your Bus Checking for $84.92. Continue these one-for-one transfers until all the PPP funds are used up.

If your online banking allows you to add a memo or description on the online banking funds transfer screen, add a short but meaningful description. Example: “PPP Transfer for electric bill” or “PPP Transfer for Payroll PE xx/xx/xx”.

Tip: Do not combine a transfer for utilities and for payroll in a single transfer; do a separate transfer for each – one transfer per expense. Use your judgement on what does make sense to put into a single combined transfer. This combination makes sense: payroll wages + payroll taxes. This combination does not make sense: Payroll + Utilities + Rent in a single transfer. Instead, make three separate transfers.

Tip: When writing the transfer check, be sure to delete any Check number (leave that field blank).

Tip: Be sure to enter the Memo/Description in what I call both the Upper and Lower memo fields, as one Memo field displays on reports and the other Memo fields displays in the Register.

QBD Register Screenshot

QBO 1QBO Register Screenshot

QBO 2


Reporting

This method keeps a clean trail of PPP Income and Expenses. However, it will not show the spending from your new PPP Bank by expense type, like on a P&L report. To obtain a spending report, you can create a custom report, but keep in mind you may end up later transposing this data to Excel for loan reporting purposes. This method also avoids Class tracking, to which you may or may not have access depending upon your QuickBooks subscription.

QBD Report

Go to: Reports | Custom Reports | Transaction Detail

Customize Report

Display Tab:

Dates: All Dates

Report Basis: Cash, even if your business is on the Accrual Basis

Filters Tab:

Account:  PPP Bank

Header/Footer Tab:

Report Title: PPP Bank Report

Remove columns you don’t want on the Display Tab, or by dragging on the report screen.

In the example below, we removed Class, Clr, Account and Original Amount.

Click (Ctrl+M) to Memorize the report.

Larry

This report still does not show a breakdown by spending category, but it is easier to print than the Account Register view.

QBO Reporting

Click on Reports

In Search Bar enter: Transaction Detail by Account Report

Customize

Report Period: All Dates

Accounting Method: Cash

Rows/Columns: Change Columns

Remove: Amount, Num, Split

Add: Debit, Credit then drag order to this:

Debit

Credit

Balance

Filter: Distribution Account | PPP Bank

Header/Footer: Report Title: PPP Bank Report

Run report

QBO Screenshot: Memorized Report

QBO 3Should You Change Your Payroll Bank Account to Your New PPP Bank Account?

At this point, we recommend not doing so. Some non-allowable expenses might be included in your payroll run, such as payments to Independent Contractors, payroll fees, and reimbursable expenses.

We think it’s better to do a manual calculation of what is allowable for each payroll run, and then transfer that specific amount. Of course, save complete details your backup calculations (most likely an Excel file), and of your payroll reports.

How to Track Spending for on Non-Allowable Expenses

You can spend PPP funds received on non-allowed expenses, but know those expenses won’t be forgiven – you will have to repay them, along with loan interest. The PPP loan must be repaid within two years, the interest rate is a low 1 percent. The lender must defer all payments of principal, interest and fees for at least 6 months, up to one year. All in all, it is quite an attractive loan.

You can track these expenses the same way, just add a notation in your Memo/Description field, such as an “NA” to start the description, like this:

Non-allowablePPP Eligible Expenses

Here are PPP guidelines copied directly from the Treasury.gov website.

What can I use these loans for?

Your clients should use the proceeds from these loans on:

  • Payroll costs, including benefits
  • Interest on mortgage obligations, incurred before February 15, 2020
  • Rent, under lease agreements in force before February 15, 2020
  • Utilities, for which service began before February 15, 2020

What Counts as Payroll Costs?

Payroll costs include:

  • Salary, wages, commissions, or tips (capped at $100,000 on an annualized basis for each employee)
  • Employee benefits including costs for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payments required for the provisions of group health care benefits including insurance premiums; and payment of any retirement benefit
  • State and local taxes assessed on compensation
  • For a sole proprietor or independent contractor: wages, commissions, income, or net earnings from self-employment, capped at $100,000 on an annualized basis for each employee

Conclusion

As we all know, things are changing daily, and it is difficult to stay abreast of all the news. We hope you find these suggestions and ideas useful. Please feel free to use the Comment section if you have alternate ideas, or find flaws in our presentation so we can correct them. In a few days, look for Part II: PPP Loan – Without Opening a Separate Bank Account.

Jody Linick is an AIPB Certified Bookkeeper, a QuickBooks® Certified Pro Advisor, and a member of the Intuit Trainer/Writer network.  Her company, FitBooks Pro (formerly called Linick Consulting), specializes in remote bookkeeping services for professional services firms using QuickBooks Online. You can find her series of Blog posts here.

Diana Cohn started the Corner Office in 1995 with the mission to teach small business owners and their staff how to use software to their advantage with the goal of achieving accuracy, efficiency, and of course, sustainable processes that create opportunities for growth.  By maintaining Intuit Certifications since 1999, as well as, attending QB Connect and Scaling New Heights, Diana remains current in applications and continues to provide support for her clients and associates.

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Replies (13)

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By SkinnVinny
Apr 22nd 2020 16:50

Nice article. I've heard of some people opening dedicated bank accounts for PPP funds, but that seems unnecessary to me, especially if there are extra fees involved.

As far as I know, as long as you can demonstrate that you incurred/paid the relevant expenses (payroll, rent, utilities, etc) you're in the clear.

So, if you received $10K and had payroll of $8k over 8 weeks after receiving the funds, you should be fine.

Thanks (0)
Replying to SkinnVinny:
Jody Linick
By Jody Linick
Apr 24th 2020 23:31

I agree, if that's simple, it will be nice and clear.

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By JJR
Apr 22nd 2020 17:10

Great article, but I chose the same path as SkinnVinny. I did NOT open a separate account for our PPP funds, but now after reading this, I'm not so sure. Especially since I'm the opposite of a QB expert, I use QB for the MOST basic things, and probably could utilize it more. I'm curios though, if I do not open a new account (for the cost involved and b/c we are such a small company and the funds are less than $50K) how do I "mark" or "tag" my normal payroll as PPP funds? I use Assisted Payroll via Intuit and I don't know if I can go back in and just change the liabilities to the expense I created for the PPP Loan funds?

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Replying to JJR:
Jody Linick
By Jody Linick
Apr 24th 2020 23:32

For you, it might be best to just track the PPP spending in a spreadsheet, instead of trying to make QB report it directly.

Thanks (1)
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By Jessi
Apr 24th 2020 11:30

Thank you for the taking the time to write this article, it is very helpful. I had decided to open a new checking account for the PPP funds and treat it similar to a LOC. I then heard and read that it would be best to have the PPP approved transactions debited from the new PPP account. What is the best way? Keep the expenses debiting out of the operating account or use the PPP account? It sounded like the simple solution - update the banking info for payroll and the covered expenses that are auto debited for the 8 week period. All transactions would be in one place and there would be no need for transfer transactions. How could that not be the right choice for my company? Instead of being proactive, I was stuck on trying to make a decision until I read “ Some non-allowable expenses might be included in your payroll run, such as payments to Independent Contractors, payroll fees, and reimbursable expenses.” Why didn’t this occur to me? I read the rules probably 20 times if not more. Decision made!! It is more efficient (in my opinion) to leave the expenses debiting out of the operating account and to reimburse the operating account for approved expenses only. Thank you!

I appreciate that you pointed out entering single transactions for the expenses instead of a lump sum. There are so many people dealing with unfamiliar territory right now and I hope they came across this site. Yes, more transactions equals more of your time but believe me, the extra time you spend now entering in separate transactions along with notes can save you hours and hours not to mention the headache you can get if there is an error! I have had issues time and time again trying to reconcile or my time wasted because the CPA had a question all because someone wanted to “save” time or did not think it was necessary to write/type what the transaction was for.

Speaking of time - It can become an issue if you do decide to have the transactions flow through the PPP account. You want to be able to use that money correctly from day one and with bank branches being closed, the process of opening a new account is not a quick in and out visit at this time.

We all do things differently and in this case there is no one perfect way to do it. What it boils down to is what SkinnyVinny said about record keeping.

Have a blessed day!

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Replying to Jessi:
Jody Linick
By Jody Linick
Apr 24th 2020 23:36

Thanks for your comments, Jessi. Every business is going to have unique scenarios, so it was hard to write a detailed, yet generic, article. We will each have to exercise our best judgement about what works/doesn't work. In all cases, I think a spreadsheet will come into play at some point. Hopefully some of the steps outlined in the article will make the final audit/accounting easier.

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By AnitaN
Apr 25th 2020 02:56

Thank you for this really good article. It's well-organized and easy to follow. The step-by-step is fabulous.

I'm *eagerly* awaiting Part II, the version that addresses how to handle the PPP loan without a new bank account. Our banker discouraged opening a new account just for this, which I understand. So the money is in our main operating account.

We are thinking of using a "job" in QuickBooks desktop for tracking any pertinent expenditures. We are a nonprofit and already use classes to segregate restricted, unrestricted, restricted spending, and transactions related to one of our auxiliary volunteer groups. (I am more comfortable with jobs and running reports on them than I am with classes.)

We also intend to keep a redundant Excel spreadsheet for reporting to our board and for ultimately stripping out the ineligible parts of payroll (which we run through Paychex).

Will keep checking this site for the sequel!

Thank you again for a helpful article.

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Replying to AnitaN:
Jody Linick
By Jody Linick
May 1st 2020 23:54

Hi, I hope you saw that the sequel was posted (see link below). I had not considered creating a separate Job for the expenses; I would have to play with that in a QB Sample Company file to see the results - interesting suggestion!

https://www.accountingweb.com/bookkeeping/covid-19-bookkeeping-part-ii-r...

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By sgamble
May 1st 2020 22:26

Thank you for this article. We use class tracking due to having two separate locations. I know that this scenario avoids class tracking, but can it still be utilized with this method?

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Replying to sgamble:
Jody Linick
By Jody Linick
May 1st 2020 23:51

Yes, Class tracking can be used, but since you can only use one Class per income and expense, it precludes using the Class you would normally select for a particular expense. I suggest you give it a try, and see if you like the results when you look at your P&L by Class.

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Meow
By KellyF
May 8th 2020 19:34

THANK YOU. We just got our PPP funded TODAY into a new bank account at a different bank. My employer was insisting that I re-route our payroll and other automatic debits for qualified payments to the new account, but I told him I didn't think that was necessary. I did some googling and found this article. When I showed it to him, he said it made perfect sense and told me handle the PPP accounting exactly as you have outlined here.

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By Cheryl Johnson
May 14th 2020 19:32

Has anyone had problems with the expenses showing up on the Accounts Payable report? I recorded the loan as a deposit and paid expenses from the bank account we are using for this purpose. The problem I am having is that when you pay a bill it automatically decreases the Accounts Payable Regular account but it needs to show as coming out of the PPP Funds account. I did a journal entry to credit the A/P Account and debit the PPP loan liability account and so the entries are reducing the PPP loan balance; however, when I printed off an A/P report to pay some bills I noticed they were on the report, so I can't figure out how to get those expenses to show as reducing the PPP loan account without showing up on the A/P report. Any suggestion? Thanks!

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By jstavish
Jun 6th 2020 03:21

Great article, appreciate the insight. Have they ruled on bonuses for staff under $100,000 in salary as to whether or not this was an allowable expense? I am reading conflicting reports. We would like to bonus staff for all of their hard work and dedication during this time, nominal amount, but want to make sure this would not cause an issue. Thank you!

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