How to Record your PPP Loan Transaction

Now that the dust is starting to settle on the PPP and the application window has officially closed, it’s time to shift gears on to how to record PPP loan transactions. There has been an abundance of commentary on how the program works, and what constitutes a qualifying expense, but the accounting of it all has been neglected. Thankfully, the AICPA has answered the calls from many CPAs on the matter and has advised on the recognition and subsequent recording of the PPP funds. While the recognition might be obvious at first, upon further review there is more than one way to record the transaction. First let’s take a look at the mechanics of each method, then we can discuss the pros and cons.

1. Loan/Debt:

• Upon receipt of the funds: Debit cash and Credit note payable
• Upon forgiveness: Debit note payable and Credit gain on extinguishment of debt (other revenue account)
• The loan would accrue interest at its stated rate until it’s officially forgiven

2. Other income/contribution:

• Upon receipt of the funds: Debit cash and Credit refundable advance (current liability account).
• Once conditions of release have been substantially met (as qualifying expenses occur): Debit refundable advance and Credit contributions or other income (revenue account).

As demonstrated above, the recognition and subsequent measurement is accounting jargon at its finest. Taking off my CPA hat, I would have the following questions:

• Why does it matter? Won’t I get to the same place regardless of which method I choose?
  • Which method should I use? Just tell me!

In response to the questions above, I’ll provide my best commentary in hopes to adequately address any skepticism on its importance. First let’s start with one assumption: the PPP loan will be completely forgiven. Since the covered period was extended from 8 weeks to 24 weeks, it is expected that almost all recipients will achieve complete forgiveness. With that fact behind us, let’s jump into the meat of the issue.

While it’s true that regardless of which method is chosen, the end result will be the same, its imperative to understand the different routes. The primary concept I want to point out is timing. Depending on year end date (fiscal or calendar) and when the official loan forgiveness take place, the transaction may span two accounting periods. If it does span two periods, there is a reporting date in the middle of the transaction, meaning a financial statement will be produced that shows where the transaction stood at that point in time. This is not a bad thing, but it is an important piece of the puzzle to consider. The financial report might be subject to covenant calculations for previously issued debt or may come under investor/donor scrutiny. While both methods will have adequate disclosures in the footnotes to the statements, a new debt on the Balance Sheet may be alarming to some if there hadn’t been debt in the past or may distort a covenant calculation.

The next aspect of timing I want to mention is the on the revenue side. The loan method (# 1) will recognize income in bulk, meaning the whole PPP amount will be recognized as income on one day (point in time). The contribution method (# 2) recognize the income over a period of time, as it’s tied to the use of the funds on qualified expenses. Since the concept of “matching’ is a fundamental accounting principle, I’d prefer to treat the funds as a conditional contribution which under this method, income and expenses are aligned. With that said, the loan method is the most straightforward and simplest, as it follows the “set it and forget it” approach which has its place. Additionally, if you’re not adverse to “debt” being displayed on the financial reports it’s the method that will require the least amount of entries.

In summary, the accounting profession has succeeded in taking an apparent simple concept and convoluted it to make it unnecessarily complex and confusing. I hope that you’ve been armed with the necessary information to make the decision on which method to choose. The above has been simplified for your sanity, but please feel free to reach out to me directly if you’d like to discuss the manner in greater detail. Congrats on getting this far, I bet you’re one of the few! Note: The above was written from the accounting (book) perspective, book and tax income can vary.