How to Record Loan Received Journal Entry? (Explanation and More)

Overview

To establish or develop the business, the organization may need to borrow money from a bank or other financial institution. Similarly, a formal loan-received journal entry will be necessary when the firm gets the loan’s funds.

In addition, interest will be charged on loan from the first day it is received. As a result, the corporation will need to make a journal entry for the loan interest later.

Loan Received – Explanation

A loan received is a liability on a company’s balance sheet, usually payable in one year. Loans received are not considered to be long-term assets.

A company will sometimes take out a loan when it is short of cash and needs to pay an expense immediately. The company typically pays interest on the loan, which means that it will have to pay back more than it borrowed.

The term “loan received” is used in accounting because the money is considered a liability. If you consider taking out a loan from a bank or other financial institution, you should know what kind of accounting treatment this will have.

Position of Loan Received on Balance Sheet

The nature of the transaction determines the position of a loan received on the balance sheet. If the loan is received from a financial institution, it will be classified as an asset because it is expected to be repaid.

If the borrower has a good credit history, the lender will consider this transaction a secured one and charge lower interest rates.

On the other hand, if the lender is unsure whether they can recover their funds, they may charge higher interest rates.

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If you plan to borrow money from someone, you should pay more interest than what you would have paid if your loan were secured by collateral such as real estate or vehicles.

Loan Received Journal Entry

At the time of loan acceptance

When the organization obtains a loan from a bank or other financial institution, it can debit the cash account and credit the loan payable account to create a journal entry for the loan received.

AccountDebitCredit
Cash$ 
Loan Payable $

Payment at the end of the period

If the firm pays the loan payment at the end of the period, the journal entry might be written as follows:

AccountDebitCredit
Loan Payable$ 
Interest Expense$ 
Cash $

Accrued Interest on the Loan Journal Entry

The interest expenditure is the cost that accumulates over time. As a result, even if no payment is expected, the corporation must account for the interest on the loan at the time it ends.

Similarly, if the cash payment has not yet been paid, the corporation must enter the following journal entry for the interest on the loan due at the end of the period:

AccountDebitCredit
Interest Expense$ 
Interest Payable – Loan $

Loan Received Journal Entry Example

For example, on January 1, 2020, the corporation XYZ Ltd. took out a $50,000 bank loan with a 6% annual interest rate for 10 years. Because it is an annuity loan, XYZ Ltd. must pay $6,794 at the end of each year, including both interest and principal, for ten years.

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What is the purpose of the loan journal entry?

1. When the firm receives cash from the bank for the loan on January 1, 2020

2. when the corporation pays the payment after the first year

We can calculate the loan payment using the information in the example above, as shown in the table below:

YearLoan balanceTotal paymentInterest paymentPrincipal payment
          50,000                     –                    –
1          46,2066,7943,000   3,794
2         42,1346,7942,722   4,072
3          37,8686,794  2,528   4,266
4          33,3466,794  2,272   4,522
5          28,5536,794        2,001   4,793
6          23,4726,794 1,713    5,081
7          18,0866,7941,408    5,386
8          12,3776,794     1,085    5,709
9          6,3266,794743    6,051
106,794   380    6,414

*The bank will usually give the payment plan as shown in the table. However, we may use the excel formula “-PMT (6 percent, 10, 50000, 0)” to determine the $6,794 payment of an annuity loan.

On January 1, 2020

When XYZ Ltd. gets cash from the bank, it can write the following loan received journal entry:

AccountDebitCredit
Cash$50,000 
Loan Payable $50,000

When the first year comes to an end

When the corporation pays the first year’s loan installment, it can write the following journal entry based on the loan payment schedule:

AccountDebitCredit
Loan Payable$3,794 
Interest Expense$3,000 
Cash $6,794

For the manual calculation, the $3,000 in interest expenditure comes from multiplying $50,000 by 6%, and the $3,794 comes from subtracting $3,000 from $6,794.

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Accrued Interest on the Loan Example

If, in the example above, the bank demanded the firm to make the first payment on January 1, 2021, the company must instead write the following interest on loan journal entry at the end of 2020:

AccountDebitCredit
Interest Expense$3,000 
Interest Payable – Loan $3,000

The corporation can then make the following journal entry to remove the interest payable when the payment was paid on January 1, 2021:

AccountDebitCredit
Loan Payable$3,794 
Interest Payable – Loan$3,000 
Cash $6,794

This journal entry has no interest expense item since the corporation has already recorded the charge in 2020. Instead, the $3,000 interest payable debit is being used to erase a corporation’s liability at the end of 2020.

Conclusion

When recording journal entries, it helps to understand how each one works from a historical perspective. Recording a loan received journal entry helps to reduce the double-entry needed for buying on credit.

By understanding how to record loan received journal entries, you can better utilize your business finances.

In this article, we have discussed a simple example of recording loan received journal entries. These journal entries are recorded when an individual or company borrows funds from another party.

This loan is repaid either periodically or at maturity with interest. We have discussed these journal entries very briefly in this article and an example. You can read it to get a clear idea of the loan received journal entry without any confusion.