How Does a Business Record a Merchant Cash Advance in QuickBooks?
In today’s fast-paced business environment, many small businesses are turning to alternative funding sources to meet their financial needs. One such option is a merchant cash advance (MCA). Unlike traditional loans, a merchant cash advance allows businesses to receive a lump sum payment in exchange for a percentage of their future credit card sales. While this can be a convenient way to obtain fast capital, it can also present challenges when it comes to accounting and bookkeeping. In this article, we will discuss how a business can record a merchant cash advance in QuickBooks, a popular accounting software, and address some frequently asked questions related to this process.
Recording a Merchant Cash Advance in QuickBooks
Step 1: Set up a liability account
To properly record a merchant cash advance, you need to create a liability account in QuickBooks. This account will track the outstanding balance of the advance. To create a new liability account, go to the Chart of Accounts and click on “New.” Choose “Other Current Liabilities” as the account type and name it something like “Merchant Cash Advance.”
Step 2: Record the initial advance
When you receive the funds from the merchant cash advance provider, you need to record it in QuickBooks as a deposit. Go to the Banking menu and select “Make Deposits.” Enter the date, the account where the funds were deposited (e.g., your business checking account), and the amount received. In the “From” field, select the liability account you created in step 1.
Step 3: Create a journal entry for the fees
A merchant cash advance typically involves fees that are deducted from your future credit card sales. To record these fees, create a journal entry in QuickBooks. Go to the Company menu and select “Make General Journal Entries.” Enter the date, the debit account (e.g., an expense account such as “Merchant Cash Advance Fees”), and the credit account (e.g., the liability account created in step 1). Enter the amount of the fees and save the journal entry.
Step 4: Record the periodic payments
As you make periodic payments to the merchant cash advance provider, you need to record them in QuickBooks. Go to the Banking menu and select “Write Checks.” Enter the date, the payee (the merchant cash advance provider), and the amount paid. In the “Expenses” tab, select the expense account you created for the fees. In the “From” field, select the liability account. Save the check.
Step 5: Reconcile the liability account
To ensure the accuracy of your records, it is important to reconcile the liability account on a regular basis. Compare the balance of the liability account with the statements from the merchant cash advance provider to identify any discrepancies. Make any necessary adjustments to bring the account into balance.
Frequently Asked Questions (FAQs)
Q1: Can I use a loan account instead of a liability account to record a merchant cash advance?
A: While it may be tempting to use a loan account, it is recommended to create a liability account specifically for the merchant cash advance. This allows for better tracking and reporting of the advance and its associated fees.
Q2: How do I account for the fees associated with the merchant cash advance?
A: The fees associated with a merchant cash advance should be recorded as an expense. Create an expense account in QuickBooks, such as “Merchant Cash Advance Fees,” and use it to record the fees through journal entries and check payments.
Q3: What if I make extra payments towards the merchant cash advance?
A: If you make additional payments towards the merchant cash advance, record them as additional checks in QuickBooks, similar to step 4. Be sure to allocate the payment to the correct expense account and the liability account.
Q4: How often should I reconcile the liability account?
A: It is recommended to reconcile the liability account on a monthly basis. This helps to ensure the accuracy of your records and identify any discrepancies or errors promptly.
Q5: Can I automate the recording process for merchant cash advances in QuickBooks?
A: Yes, you can streamline the recording process by using QuickBooks add-ons or third-party apps that integrate with QuickBooks. These tools can automate the tracking and reconciliation of merchant cash advances, saving you time and effort.
In conclusion, recording a merchant cash advance in QuickBooks requires careful attention to detail and the creation of specific accounts to track the advance and associated fees. By following the steps outlined in this article and regularly reconciling the liability account, businesses can accurately record and manage their merchant cash advances in QuickBooks, ensuring their financial records remain organized and up to date.