I’m asking about generally accepted practices in bookkeeping.
This is not a request for tax advice; I have a competent local CPA that I ask tax questions. I will ask him about the tax implications of the transaction I’m about to reference.
I took an advance against business inventory from Kabbage.
They charge what they refer to as an “Advance Charge”.
In Quickbooks, should I enter this as ‘Interest Paid’ or as ‘Bank Charges’ ?
I would say, if it was a specific charge, and not real interest, then it’s a banking-type charge.
Do they charge a specific amount based on time and a fixed rate? Or is it a fee, simply scaled roughly on the amount and time? Or should you split it into fee and interest?
The real question is, what do you want to know? When you tally up the books at the end of a quarter or year, you want to see how much you spent on different expenses. If you look at interest paid and say “wow, it works out I was paying 35% annual rate on cash advances” then you may want to investigate alternative sources. If it’s a fee you must pay to do business the way they offer to you, and you con’t get out of it, then it’s a fee and you need to know what your real total service fees are.
The main lesson for accounting is “what does this expense mean?” and “Be consistent”. However you decide to categorize it, keep doing it that way so you can get a real picture what the activity costs you.
I’ve seen Kabbage’s pitch, and would call their charges interest. (For those who don’t know, they offer short-term business loans paid back over six months and charge a diminishing percentage rate each month; your APR can be something like 50% when all is calculated.)
As a general rule, bank charges are for the use of a bank’s services; interest is for the use of a bank’s money.
But ultimately you want to put it where your CPA asks you to put it. The same goes with the account for the liability.
Do you want to discuss accounting theory or just wanting a simple answer for your small business books?
Are your books audited? Kept in accordance with GAAP? On an accrual basis or cash basis?
What is the tenor (maturity) of your loan? Less or greater than a year?
In a theoretical sense, in a large multi year debt facility, there are numerous upfront fees that are paid, origination fees, discount fees, underwriting fees, etc. Under US GAAP, many of these fees are capitalized as loan origination costs and amortized over the life of the loan as interest costs.
Omar,
I’m wanting an answer for my small business books; I just don’t want to be any more ‘non-standard’ than I have to.
This is a US business; an audit is possible, but there’s no particular reason to anticipate one. GAAP is not a concern, at least in my mind.