Table of Contents
Loan Received by a Business
Obtaining a loan from a bank or other financial institution is a common way for companies to access the financial resources they need to fund their operations and support their growth. There are many different reasons why a company might need to borrow money, such as to purchase new equipment, hire and pay employees, or purchase inventory.
When a company obtains a loan, it is required to repay the loan over a period of time, typically in the form of regular payments that include both the principal amount of the loan and an interest component. Interest is the cost of borrowing money and is typically expressed as a percentage of the loan amount. The interest rate on a loan can vary depending on factors such as the creditworthiness of the borrower, the term of the loan, and the market interest rates.
It is important that proper accounting occurs at various intervals, including:
- Loan receipt date
- Fiscal year-end (to accrue loan interest)
- Loan repayment date
Journal Entries for Loan Received
Journal entry for a loan received from a bank
When a business receives a loan from a bank, the Cash asset account is debited for the amount received, and the Bank Loan Payable liability account is credited for the amount received that must be paid back to the bank at some point in the future.
Depending on the terms of the loan, the liability may need to be divided into two separate accounts on the balance sheet: a long-term liability account and a short-term liability account.
A long-term liability account is used to record liabilities that are due more than one year in the future. This could include loans with a repayment term of several years or more. A short-term liability account, on the other hand, is used to record liabilities that are due within one year. This could include loans with a repayment term of less than a year or any other short-term obligations that the company has.
The net impact on the company’s balance sheet is the same regardless of whether the liability is recorded in a long-term or short-term account. However, the distinction between long-term and short-term liabilities can be important for financial reporting purposes. Some financial reporting standards, such as International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP), require companies to disclose the breakdown of their long-term and short-term liabilities in their financial statements. This can provide valuable information to stakeholders, such as investors and creditors, about the company’s financial position and the nature of its obligations.
Example: ABC Landscaping Inc. received a $600,000 loan from Royal Trust Bank on January 1, 2022. The loan carries an interest rate of 5% per year and must be repaid in full, including all accrued interest, on January 1, 2023. The journal entry to recognize the receipt of the loan funds is as such:
January 1, 2022
| Account | ||
|---|---|---|
| Cash | $600,000 | |
| Bank loan payable | $600,000 |
On December 31, 2022, the interest accrued on the loan must be recognized. As at December 31, 2022, interest in the amount of $30,000 [$600,000 x 5%] has been accrued on the Royal Trust Bank loan.
December 31, 2022
| Account | ||
|---|---|---|
| Interest expense | $30,000 | |
| Loan interest payable | $30,000 |
Journal entry for a bank loan repaid in full
When the business pays back the bank, the Bank Loan Payable liability account is debited for the amount originally received, the Loan Interest Payable liability account is debited for the interest accrued in respect of the loan, and the Cash asset account is credited for the amount of cash paid to the bank in respect of the loan principal and interest.
Example: ABC Landscaping Inc. received a $600,000 loan from Royal Trust Bank on January 1, 2022. The loan carries an interest rate of 5% per year and must be repaid in full, including all accrued interest, on January 1, 2023. The journal entry to recognize the repayment of the loan funds and interest is as such:
January 1, 2023
| Account | ||
|---|---|---|
| Bank loan payable | $600,000 | |
| Loan interest payable | $30,000 | |
| Cash | $630,000 |
