Debt Service

Credit Cards

Credit cards create a timing difference between when a purchase is made and when cash leaves the company's bank account. From an accounting perspective, a credit card balance is a liability: money the company owes to the card issuer. ERPNext can track credit card transactions and reconcile them against statements using the Bank Reconciliation feature, but this requires specific account configuration.

Account Setup

ERPNext can understand a credit card as a "reverse bank account"—instead of holding money the company owns, it tracks money the company owes. This framing unlocks a powerful capability: the same Bank Reconciliation workflow used for checking accounts works for credit cards. When a credit card statement CSV is imported through Bank Reconciliation, the transactions appear in the Bank Transaction table just like bank transactions would. The reconciliation process—matching statement lines to recorded entries, identifying discrepancies, and marking items as reconciled—is fundamentally identical.

To enable this, configure the credit card account with account type "Bank" and root type "Liability". The "Bank" type gives access to the reconciliation interface; the "Liability" root type ensures the balance appears correctly on the balance sheet. Create a corresponding Bank record linked to this account to complete the setup.

Recording Purchases

When a credit card is used to pay a vendor invoice, for example purchasing $450 of equipment parts from a supplier, the payment is recorded as a Payment Entry with the credit card account as the payment method:

For expenses that don't flow through a Purchase Invoice—such as a $75 fuel purchase or a $120 subscription renewal—use a Journal Entry that debits the appropriate expense account and credits the credit card liability:

Statement Reconciliation

At statement close, import the credit card statement through Bank Reconciliation. Match each statement line to the corresponding Payment Entry or Journal Entry in ERPNext. Discrepancies may arise from merchant fees, returns, chargebacks, or timing differences. The reconciliation process is identical to bank account reconciliation—the difference is that the reconciled balance represents money owed rather than money held.

Paying the Credit Card Bill

When the company pays the credit card bill from its operating account, the payment reduces the credit card liability:

If the company carries a balance and incurs interest charges, record the interest as an expense when it appears on the statement:

Notes Payable and Loan Accounting

Loan accounting in ERPNext uses Journal Entry rather than Payment Entry. Payment Entry is designed for paying parties (Customers or Suppliers) and tracks through Accounts Receivable or Accounts Payable. Loans are tracked in balance sheet liability accounts directly—there's no "loan party" type in ERPNext—so Journal Entry is the appropriate DocType. The Journal Entry offers an additional advantage of being able to break out principal and interest in the same transaction.

Loan Origination

When a loan is funded, use a Journal Entry to record the cash received and the corresponding liability. Continuing the example from the Assets article, the company finances a $35,000 delivery vehicle with a $5,000 down payment and a $30,000 loan. The asset was capitalized at purchase; the loan funding is recorded separately:

For secured loans, maintaining a cross-reference between the Asset record and the loan account (via naming convention, custom field, or documentation) helps track which assets secure which obligations. When the loan is repaid in full, the lien is released.

Deferred Financing Costs

Loan origination fees, points, and other upfront costs paid to obtain financing are not expensed immediately. These costs are capitalized as a deferred asset and amortized over the loan term. If the vehicle loan above included a $600 origination fee:

Over a 60-month loan term, the monthly amortization is $10. This can be automated with Auto Repeat on a Journal Entry since the amortization is straight-line:

Deferred financing costs can be tracked using ERPNext's Asset module (as an intangible asset) or as a simple balance sheet account with manual or auto-repeated amortization entries.

Loan Amortization and Payments

Record each loan payment with a Journal Entry that splits the amount between principal reduction and interest expense. The principal/interest allocation comes from the lender's amortization schedule—ERPNext does not calculate this automatically for company debt.

For the $30,000 vehicle loan at 6% annual interest over 60 months, the monthly payment is approximately $580. In the first month, the lender's schedule shows $430 principal and $150 interest:

By month 48, the same $580 payment splits as $540 principal and $40 interest. Although the split changes each month, Auto Repeat on Journal Entry still provides value: configure it to create a draft entry each month with the fixed payment amount and the account structure in place. When the draft appears, update the principal and interest amounts from the lender's statement and submit. This is lower friction than creating each entry from scratch—the draft serves as both a reminder and a starting point.

Interest Expense

For most companies with monthly payment schedules, recording interest at the time of payment (as shown above) is sufficient and preferred—it captures the expense in one entry without additional reclassification work.

Period-end accruals are necessary when the payment date doesn't align with the reporting period close and the interest amount is material. If the loan payment is due on the 15th but the books close on the last day of the month, fifteen days of interest has accrued but not yet been paid. To accrue:

When the payment is made in the following period, reverse the accrual and record the full payment:

This pattern adds complexity and is only worthwhile when the timing difference affects financial statements that external parties rely on. For internal management reporting or immaterial amounts, recording at payment time is simpler and equally accurate over time.

Asset-Backed Loans

When a loan finances a specific asset—like the vehicle loan above: the asset and the liability follow independent schedules. The vehicle depreciates based on its useful life (perhaps $7,000 per year over five years using straight-line), while the loan balance decreases according to the amortization schedule. After two years, the vehicle's book value might be $21,000 while the loan balance is $19,500. The two amounts converge only by coincidence; more commonly, one exceeds the other depending on depreciation method and loan terms. See the Assets article for depreciation accounting.

Capital and Finance Leases

Capital leases require tracking two separate but related items in ERPNext: a right-of-use asset that depreciates, and a lease liability that amortizes. ERPNext handles these through different modules.

Recording a Capital Lease

At lease inception for a five-year equipment lease with monthly payments of $1,200 (present value approximately $62,000), use a Journal Entry to establish both the asset and liability:

Simultaneously, create an Asset record in ERPNext for the right-of-use asset. Check "Is Existing Asset" (since it wasn't purchased through a Purchase Invoice), set the gross purchase amount to the present value, and configure the depreciation schedule for the lease term. ERPNext's Asset module then generates depreciation entries automatically.

The lease liability account is a standard liability account, no special configuration required. The balance decreases as payments are made.

Lease Payments

Set up the leasing company as a Supplier. For lease payments, you have two options:

Payment Entry with Journal Entry for interest: Use Payment Entry to pay the Supplier, allocating the payment against the Lease Liability account (configure this as the Supplier's default payable account, or specify it on each transaction). This handles the principal reduction. Record the interest portion separately via Journal Entry debiting Interest Expense and crediting the Lease Liability.

Journal Entry for the full payment: A single Journal Entry can record principal, interest, and the bank debit in one transaction. This is often simpler when the principal/interest split changes each month.

Each payment splits between principal and interest per the lessor's amortization schedule. For the first month ($310 interest, $890 principal):

Since the principal/interest split changes each month, Auto Repeat on Journal Entry doesn't work well here. Options:

• Create each month's Journal Entry manually from the amortization schedule
• Import Journal Entries in bulk from a spreadsheet at the start of each year
• Set up the lessor as a Supplier and use Payment Entry if you want party tracking, but then the liability flows through Accounts Payable rather than a dedicated lease liability account

The depreciation entries for the right-of-use asset post separately through ERPNext's automatic depreciation processing, typically monthly. These entries are independent of the lease payments.

Lines of Credit and Revolving Debt

Lines of credit involve frequent draws and repayments, making the choice of DocType important for efficiency.

Setup and Draw Tracking

Create a liability account for the line of credit (root type: Liability, no special account type needed). ERPNext doesn't track credit limits natively—store the limit in the account description or a custom field for reference.

For draws and repayments, use Journal Entry rather than Payment Entry. A line of credit isn't a party (Customer or Supplier), so Payment Entry—which requires a party—doesn't fit naturally. Journal Entry directly adjusts the liability balance:

Draw $25,000:

Repay $10,000:

Interest Calculation

Record interest from the lender's monthly statement via Journal Entry. If interest is added to principal (compounding):

If interest is paid immediately from the operating account:

Borrowing Base and Asset-Backed Lending

For asset-backed facilities, the borrowing base certificate requires pulling data from ERPNext reports:

• Eligible receivables: Use Accounts Receivable Aging report, filtered to exclude balances over the eligibility threshold (for example, over 90 days). The report's standard filters handle this directly.
• Eligible inventory: Use Stock Balance report for current values. Custom Script Reporting or Query Reports may be needed to exclude ineligible categories (consignment, obsolete, WIP) if standard filters don't suffice.

The available credit (borrowing base minus current draw) should be monitored regularly. ERPNext doesn't calculate this automatically—build a custom report or dashboard that compares the line of credit account balance against a calculated borrowing base from receivables and inventory reports.

Debt Covenants and Compliance

Loan agreements often include financial covenants—debt-to-equity ratios, minimum cash balances, EBITDA thresholds—that require periodic monitoring. ERPNext does not have built-in covenant tracking, but custom exception reports can flag when key ratios approach or breach covenant limits, providing early warning before a compliance issue becomes a default.