Debt Tracking: How to Keep Debts in Both Directions Under Control

Debt tracking works when every debt is recorded separately, with an amount, a counterparty, and a due date, and when debts you owe and debts owed to you sit side by side. Then you can see the business's net position, the nearest payments, and the records whose due date has already passed.

Let's go through five conditions under which debt tracking works, calculate a debt position on one example, and see what happens to profit when a debt payment is recorded separately from expenses. We won't cover the terms themselves (accounts payable and accounts receivable) here: they're explained in separate materials.

In plain terms. Picture a notebook in a small shop. It has two sections: the first lists who owes the shop, the second lists whom the shop owes. Next to each entry are an amount and a date. That notebook answers three questions: who, how much, and by when. Debt tracking in a business works the same way, there are just more entries.

Why track debts in both directions

Both directions affect the same account balance. A customer who delays payment and a supplier whose payment is due sit in the same calendar. If you track only one direction, you see half the picture: you can know how much is owed to you and not see how much you yourself need to pay out this week.

The difference between the two amounts is called the net debt position. It shows who is in the black in this pairing: the business or its counterparties.

Five conditions under which debt tracking works

Every debt has its own record

One debt means one record with an amount, a counterparty, a date it arose, and a due date. Several payments on one debt are stored inside the record, separate from ordinary transactions. Then the question “how much is still left on the machine” has an immediate answer, with no need to tally up transactions. The contract number and terms are convenient to keep in the record's notes.

Both directions sit side by side

Debts you owe and debts owed to you are convenient to see in one place and in one currency for the total. Then you see both the difference between them and each amount separately.

Every record has a due date

A debt without a due date has no moment when it becomes overdue, so it won't show up in the list of overdue items. Even a verbal agreement of “when I can” is easier to handle if it's recorded with an approximate date. The date can always be changed when the agreement changes.

Debt repayment and interest are recorded separately from expenses

Repaying an amount you borrowed isn't an expense: you're returning what you received. Only the fee for using the money, meaning interest, is an expense. If the whole payment is booked as an ordinary expense, the month's profit ends up understated by the amount of the principal. The same rule works in the opposite direction: getting back what you lent isn't income, only the interest is.

Debts get reviewed every week

A weekly review has three steps. First, the records whose due date has already passed. Then the payments in the next thirty days. Finally, the records without a due date, which should be given one. That order puts first what already calls for a conversation.

Advice. It's convenient to assign the review a specific day of the week, such as Friday. A regular review helps you spot overdue items in time: records that get reviewed weekly rarely have a chance to go overdue unnoticed.

How to calculate your debt position

Net debt position = Owed to the business − The business owes

Picture Maryna. She runs a small print shop and has gathered all her debts into one list. Here it is.

Step one: add up everything owed to the business. $5,000 + $3,000 = $8,000. That's customers A and B.

Step two: add up everything the business owes. $3,500 + $4,000 + $1,000 = $8,500. That's the supplier, the machine loan, and the partner's loan.

Step three: calculate the net position. $8,000 − $8,500 = −$500. Overall, the business owes $500 more than is owed to it.

Step four: break it down by due date. In the next thirty days, Maryna has to pay $3,500 to the supplier and the first payment on the machine, $540, for $4,040 in total. Expected receipts by due date in that time: $5,000 from customer A. How the $540 payment is made up, we'll go through below.

Step five: mark what needs attention. There are two such items. The first: customer B's $3,000, whose due date has passed. The second: the partner's $1,000 loan with no due date. The first needs a conversation, the second needs a date. The net position of −$500 doesn't show this: these two items are visible only in the list.

What happens to profit when a payment is recorded correctly

Let's take the machine loan: a $4,000 balance, 12% per year, eight payments, with the principal part of each at $500. Interest is charged on the remaining principal balance.

Monthly interest = Remaining principal × Annual rate ÷ 12

Debt payment = Principal part + Interest

First month. Interest: $4,000 × 0.12 ÷ 12 = $40. Payment: $500 + $40 = $540.

Second month. The balance is now $3,500, so interest is lower: $3,500 × 0.12 ÷ 12 = $35. Payment: $500 + $35 = $535. Each following payment is slightly smaller than the last, because interest is calculated on a shrinking balance.

If Maryna booked the whole payment as an ordinary expense, the month's profit would drop by $540 instead of $40. The $500 difference reduces the debt and isn't a business expense.

Careful. The interest calculation in the example is approximate. A bank or an app may calculate by the actual number of days in the month, so amounts will differ by a few cents.

Why isn't the principal part considered an expense? An expense reduces what the business has. Repaying a debt reduces both what the business has (funds) and what it owes (the debt). Equity doesn't change as a result, so profit doesn't change either.

When a debt is closed only in part

Let's return to customer B. After a conversation, they paid $2,000, and the parties agreed that the rest, $1,000, wouldn't be repaid. No money moves in this case, but for profit, the event has happened: the $1,000 that was an expected receipt won't be received by the business. That's a loss, meaning an expense.

In the reverse case, when part of a debt is forgiven to you, the difference becomes income. If a debt is closed by offset or barter, the treatment depends on what the business received in exchange, so such cases are worth agreeing with an accountant. The write-off procedure and tax consequences differ from country to country, so check them with an accountant or lawyer in your country.

How this looks in your books

In BizFin, debts are kept in the “Debts” section. First you create an account of one of three types: “Debts (to suppliers, acquaintances),” “Loans (loans, installments),” or “Owed to Me (customers, acquaintances).” Records get added to it. Each record stores the amount, counterparty, date it arose, term, interest, and notes, and the payments are gathered in its history.

At the top of the page are four cards: “I Owe,” “Owed to Me,” “Overdue,” and “Closed This Month.” The difference between the first two is the net debt position from the example. The “Overdue” card shows records whose term has passed, so a record without a term can't end up in it. You can click it: the list then keeps only the overdue records from both directions.

A loan with interest is convenient to keep with a payment schedule. You choose the number of payments and the “Declining balance” method, and the payment is made up of a principal part and interest, as in the example. The next payment is visible in the reminder calendar at the top of the page. In the “Profit and Loss” report, loan payments are shown in a separate list and don't reduce profit, while interest on debts sits in its own section and does reduce profit.

When a debt is closed only in part, in the closing window you choose a reason, “Debt forgiven or written off” or “Closed another way,” and optionally leave a note. The remainder appears in the report as “Debt Write-off” (income) for debts you owe, and as “Receivables Write-off” (expense) for debts owed to you. Funds in your accounts don't change as a result.

Careful. The section has limits. A schedule is built only when the record is created, so it can't be added to a record that already exists. Late-payment penalties aren't calculated, there's one rate for the whole term, and reminders are visible only in the calendar icon: they aren't sent to your email or phone. An extra payment beyond the plan recalculates the amount of future payments, while their number stays the same.

What's worth remembering

• One debt means one record. Amount, counterparty, date it arose, and due date sit together, while payments are gathered in the record's history.

• Both directions sit side by side. The difference between what's owed to you and what you owe gives the net debt position.

• A due date makes a debt visible. A record without a due date doesn't become overdue and drops out of the review.

• The principal part of a payment isn't an expense. Only the interest is, and a written-off balance enters profit as a separate line.

• The weekly review starts with what's overdue. Then the next thirty days, then the records without a due date.

Frequently asked questions

How do you track debts in a business?

Record every debt as its own entry with an amount, counterparty, and due date, keep both directions in one place, and separate debt repayment from expenses. Once a week, review the overdue records and the payments in the next thirty days.

Is repaying a debt an expense?

No. Repaying an amount you borrowed reduces the debt and doesn't reduce profit. Only interest counts as an expense. In the other direction, getting back what you lent isn't income, but the interest is.

How do you calculate the net debt position?

Subtract what the business owes from what's owed to the business. In the article's example, that's $8,000 − $8,500 = −$500.

What should you do if a customer hasn't repaid the debt in full?

Close the record with the remainder and state the reason: the debt was forgiven, written off, or closed another way. The unpaid part of what's owed to you goes into expenses, and the part forgiven to you goes into income. Check the write-off procedure with an accountant in your country.

Do you have to specify a due date and interest?

A due date is worth specifying every time: without it, the record doesn't become overdue and drops out of the review. Interest is specified when the terms of the debt include it. Without a rate, the amount is split into equal payments.

How often should you review debts?

Once a week is enough. It's worth starting with the due dates that have passed, then the payments in the next thirty days and the records without a due date.