Essential Guide to PPP Loan Accounting: Record Income & Expenses
PPP loan accounting requires businesses to record Paycheck Protection Program funds as either debt under ASC 470 or government grants under IAS 20, while meticulously tracking qualifying expenses and properly recognizing forgiveness when legally confirmed. The process involves creating dedicated accounts, maintaining detailed documentation for potential 10-year audits, and following specific GAAP standards for financial statement presentation.
Over my 20 years as CEO of Complete Controller, I’ve helped thousands of businesses navigate complex financial challenges, but the PPP loan program created unprecedented accounting complexities that caught even seasoned professionals off guard. With 80% of all PPP loans achieving full or partial forgiveness (representing 83% of total loan value), yet fraud estimates reaching $200 billion, proper accounting procedures have become critical for protecting your business from both compliance failures and potential legal consequences[20][6]. This guide walks you through the exact steps to establish bulletproof PPP loan accounting systems, track qualifying expenses with precision, and position your business for smooth forgiveness while maintaining audit-ready documentation.
What is PPP loan accounting and how do you get it right?
- PPP loan accounting involves recording loan proceeds as debt (ASC 470) or grants (IAS 20), tracking expenses, and recognizing forgiveness properly
- Debt approach treats PPP funds as traditional loans with interest accrual until legal forgiveness confirmation
- Grant approach allows deferred income recognition when forgiveness probability is high
- Expense tracking requires 60% payroll costs and 40% eligible non-payroll expenses with supporting documentation
- Financial statements must clearly present PPP loans and forgiveness gains separate from operating activities
Understanding the Two Primary PPP Loan Accounting Approaches
The foundation of proper PPP loan accounting rests on choosing between two generally accepted approaches under U.S. GAAP. The debt approach treats PPP loans as traditional financing under ASC 470, while the grant approach applies IAS 20 principles by analogy for government assistance programs[5]. This fundamental choice impacts every subsequent accounting decision from initial recording through forgiveness recognition.
Under the debt method, businesses record the full loan amount as a liability and accrue 1% annual interest throughout the loan term. The loan remains on the balance sheet as debt until the Small Business Administration legally releases the borrower, at which point forgiveness becomes a gain on debt extinguishment. This conservative approach aligns with traditional loan accounting that most businesses already understand.
ASC 470 debt treatment for PPP loans
The debt treatment requires straightforward journal entries that mirror standard loan transactions. Upon receiving funds, businesses debit cash and credit a PPP loan liability account for the full amount[19]. Monthly interest accrual follows standard practices, debiting interest expense and crediting accrued interest payable at approximately $83 per month for each $100,000 borrowed.
Qualifying expenses paid with PPP funds receive normal accounting treatment through standard expense accounts. The key distinction lies in maintaining supplementary tracking documentation rather than creating special accounting entries. This approach keeps financial statements clean while preserving necessary audit trails for forgiveness applications and potential SBA reviews.
Government grant approach using IAS 20
The alternative grant approach treats PPP loans as deferred income when forgiveness appears probable from the outset[11]. Initial receipt creates a deferred income liability rather than traditional debt, with systematic recognition into income as qualifying expenses occur during the covered period.
This method provides intuitive matching between expense incurrence and income recognition, particularly appealing for businesses confident about meeting forgiveness criteria. The approach requires careful assessment of forgiveness probability and may necessitate reversal if circumstances change unexpectedly.
Setting Up Your PPP Loan Accounting Infrastructure
Creating robust accounting infrastructure begins with establishing dedicated general ledger accounts that segregate PPP transactions from regular business operations. With community banks handling 57.5% of all PPP loans, most small businesses worked with local institutions requiring specific documentation standards that varied by lender[7]. This variation makes standardized internal tracking systems even more critical.
The recommended chart of accounts includes a PPP loan liability account, potentially a separate PPP cash account, and designated income accounts for forgiveness recognition. Many businesses also implement class tracking or department codes to maintain granular expense documentation without disrupting standard accounting workflows.
Creating dedicated bank accounts for PPP tracking
Opening a separate bank account exclusively for PPP funds creates the clearest possible audit trail[3]. Depositing loan proceeds directly into this dedicated account and paying only qualifying expenses from it automatically documents fund usage. The account balance provides real-time visibility into remaining PPP funds available for eligible expenses.
Practical limitations sometimes prevent separate accounts, particularly when banks restricted new accounts during peak pandemic periods or funds were already commingled. These situations require enhanced general ledger tracking through detailed coding systems and regular reconciliation procedures to maintain equivalent documentation standards.
QuickBooks setup for PPP loan tracking
QuickBooks users should establish a long-term liability account titled “PPP Loan” and enable class tracking for detailed reporting[12]. The initial setup involves creating the liability account through the Chart of Accounts menu, then activating class tracking in Company Preferences to establish a specific PPP class designation.
Recording the initial deposit requires a journal entry debiting the bank account and crediting the PPP loan liability while assigning the PPP class. Ongoing expense tracking uses standard transaction entry with PPP class assignment, creating comprehensive reports for forgiveness applications without disrupting normal accounting workflows.
Recording PPP Loan Proceeds and Initial Setup
Initial recording of PPP loan proceeds establishes the foundation for all subsequent accounting and compliance requirements. The entry timing should match actual fund receipt rather than application approval dates, maintaining proper cash flow statement presentation[18]. Given that SBA lending increased 18x from traditional $28 billion annual volumes to over $525 billion through PPP, standardized recording procedures became essential for consistent financial reporting[14].
Documentation requirements include recording loan numbers, lender information, interest rates, and maturity dates within the accounting system. These details prove invaluable during forgiveness applications and potential audits extending up to 10 years post-disposition.
Standard journal entries for PPP loan receipt
The debt approach requires a simple entry debiting cash and crediting PPP loan payable for the full amount received. A $100,000 loan generates a $100,000 debit to cash and $100,000 credit to PPP loan payable, with detailed memo fields capturing lender and loan identification information[2].
Monthly interest accrual follows throughout the loan term, regardless of forgiveness expectations. The standard entry debits interest expense for $83.33 (on a $100,000 loan) and credits PPP interest payable, maintaining accurate financial position reporting until legal forgiveness confirmation.
Recording loan origination costs and fees
Direct costs of obtaining PPP funding, including legal or accounting fees, technically qualify as deferred financing costs under traditional debt accounting[2]. These costs would reduce the loan’s carrying value and amortize over the expected term using the effective interest method.
However, materiality considerations and expected forgiveness timelines often make immediate expensing more practical. Most businesses expense these costs directly, particularly when amounts remain insignificant relative to loan values or forgiveness appears highly probable.
Tracking Qualifying PPP Loan Expenses
Meticulous expense tracking forms the cornerstone of successful PPP loan forgiveness, with specific requirements for documenting both payroll and non-payroll costs. The 60/40 rule mandates that at least 60% of loan proceeds support payroll costs, leaving up to 40% available for other qualifying expenses[3]. Recent fraud cases, including the conviction of Rahul Shah for fabricating $441,138 in payroll expenses, demonstrate severe consequences for inadequate documentation[15].
Qualifying payroll costs encompass gross wages, employer health insurance contributions, retirement plan contributions, and state/local payroll taxes for employees earning under $100,000 annually. Non-payroll expenses include business rent, utilities, mortgage interest, and covered operations expenditures, all requiring pre-February 15, 2020 existence.
Payroll cost documentation and recording
Comprehensive payroll documentation requires maintaining payroll registers, tax filings, and benefit contribution receipts throughout the covered period. Standard payroll journal entries continue unchanged, but supplementary tracking identifies which costs count toward forgiveness requirements[16].
Creating period-specific reports showing employee-by-employee compensation helps demonstrate compliance with individual compensation limits. These reports should reconcile to filed payroll tax returns and bank statements showing actual payment clearance.
Non-payroll qualifying expense management
Non-payroll expenses demand equally rigorous documentation, including original agreements, monthly statements, and payment verification[3]. Rent payments require lease agreements dated before February 15, 2020, plus cancelled checks or ACH confirmations for each payment.
- Business Rent: Lease agreement, monthly invoices, payment confirmations
- Utilities: Account statements in business name, payment documentation
- Mortgage Interest: Amortization schedules isolating interest portions
- Operations Expenditures: Supplier agreements, invoices, payment records
- Software Subscriptions: Service agreements, monthly statements, bank records
PPP Loan Forgiveness Accounting Treatment
Forgiveness accounting depends entirely on receiving legal release from the lender following SBA approval, not merely expecting or applying for forgiveness[1]. This critical timing distinction prevents premature income recognition and maintains compliance with GAAP standards. The unprecedented 93% forgiveness rate for 2020 PPP loans makes proper accounting treatment relevant for most borrowers[20].
The debt approach recognizes forgiveness as a gain on debt extinguishment, while the grant approach systematically recognizes deferred income. Both methods require clear financial statement presentation separating PPP impacts from operating results.
Recording complete loan forgiveness
Complete forgiveness under the debt approach eliminates the entire loan balance through a straightforward entry. The journal entry debits PPP loan payable and accrued interest while crediting other income or PPP loan forgiveness income[10]. This gain appears separately from operating income, preserving period-to-period comparability.
Grant approach forgiveness recognizes any remaining deferred income balance based on expense patterns during the covered period. The income recognition can appear as other income or reduce related expenses, though separate presentation provides clearer financial analysis.
Partial forgiveness accounting considerations
Partial forgiveness splits the original loan between forgiven and continuing debt portions[11]. The forgiven amount follows complete forgiveness accounting, while the remainder continues accruing interest with scheduled repayments over the loan term.
Allocating origination costs and accrued interest between forgiven and non-forgiven portions requires proportional calculations. Documentation of this allocation supports both immediate gain recognition and ongoing debt service accounting.
Final Thoughts
PPP loan accounting demands precision and foresight that many businesses underestimate until facing forgiveness complications or audit inquiries. The stakes remain high with $200 billion in estimated fraud triggering aggressive enforcement actions and extended 10-year audit windows. Your accounting decisions today directly impact your business’s financial credibility and audit readiness for the next decade.
Taking action now to review and strengthen your PPP loan accounting positions your business for smooth forgiveness and long-term compliance. Whether you need to retroactively improve documentation, adjust accounting treatments, or prepare for upcoming audits, professional guidance makes the difference between confidence and costly mistakes. Contact the experts at Complete Controller for comprehensive support navigating these complex requirements and protecting your business’s financial future.
Frequently Asked Questions About PPP Loan Accounting
Can I change my PPP loan accounting method after initially recording it?
Yes, businesses can change from the debt approach to the grant approach (or vice versa) before forgiveness occurs, but the change requires careful documentation and may impact financial statement comparability. Any change should be disclosed in financial statement footnotes with explanation of the rationale and impact.
How long must I keep PPP loan documentation for potential audits?
The SBA requires maintaining all PPP loan documentation for 10 years after loan forgiveness or final payment, whichever occurs later. This includes loan applications, supporting payroll documentation, expense receipts, forgiveness applications, and all correspondence with lenders.
Should PPP loan interest expense be accrued if I expect full forgiveness?
Under the debt approach, businesses must accrue interest monthly at the 1% rate regardless of forgiveness expectations. Only upon legal confirmation of forgiveness can accrued interest be reversed along with the principal balance as part of the forgiveness gain.
How do I handle PPP expenses paid before receiving loan funds?
Expenses paid before receiving PPP funds but during the covered period still qualify for forgiveness. Track these expenses separately and include them in forgiveness calculations with clear documentation showing payment dates and funding sources to support the eventual reimbursement claim.
What happens to my PPP accounting if forgiveness is denied?
Denied forgiveness converts the full loan balance to traditional debt requiring repayment over the specified term. Businesses using the grant approach must reverse any income recognition and reclassify the balance as debt, while those using the debt approach simply continue with normal loan accounting and scheduled payments.
Sources
- AICPA. (2022). “Overview of PPP Loan Accounting Standards and Journal Entry Requirements.” www.aicpa.org
- Baker Newman Noyes. (2021). “Step-by-Step PPP Loan Accounting Treatment.” www.bnncpa.com
- Bench. (2021). “Tracking PPP Funds: Best Practices for Small Businesses.” www.bench.co
- Doeren Mayhew. (2022). “PPP Loan Accounting: Debt vs. Grant Approaches for For-Profit Entities.” www.doeren.com
- Grant Thornton. (2021). “PPP Loan Accounting Guide: ASC 470 vs. IAS 20 Treatment.” www.grantthornton.com
- Husch Blackwell. (2025). “PPP Loan Audits and Investigations Expected to Continue.” www.huschblackwell.com
- Independent Banker. (2021). “Tips for a Successful PPP Audit.” www.independentbanker.org
- IRS. (2022). “COVID-19 Relief FAQs for Businesses and Corporations.” www.irs.gov/newsroom/covid-19-relief-faqs-for-businesses-and-corporations
- IRS. (2022). “FAQs on the Paycheck Protection Program.” www.irs.gov/newsroom/faqs-on-the-paycheck-protection-program
- Ketel Thorstenson. (2021). “Proper PPP Loan Accounting Methods.” www.ktllp.com
- Pugh CPAs. (2021). “PPP Loan Accounting Options for Expected Forgiveness.” www.pughcpas.com
- QuickBooks. (2022). “Recording PPP Loan Forgiveness in QuickBooks.” www.quickbooks.intuit.com
- Richey May. (2021). “Comparing ASC 470 vs. IAS 20 for PPP Loans.” www.richeymay.com
- SBA. (2020). “SBA Achieves Historic Small Business Lending for Fiscal Year 2020.” www.sba.gov
- SBA. (2025). “Suburban Chicago Businessman Convicted for Role in Bank Fraud, PPP Fraud Schemes.” www.sba.gov
- Small Business Administration. “Paycheck Protection Program.” www.sba.gov/funding-programs/loans/coronavirus-relief-options/paycheck-protection-program
- Squire. (2021). “US GAAP Treatment for PPP Loan Forgiveness.” www.squire.com
- Windham Brannon. (2021). “Detailed Journal Entries for PPP Loans.” www.windhambrannon.com
- Windes. (2021). “Practical Guide to PPP Loan Accounting.” www.windes.com
- Wolters Kluwer. (2022). “SBA Issues Year-end PPP Loan Forgiveness Report.” www.wolterskluwer.com
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Brittany McMillen
Brittany McMillen