Loan accounting entries involve debiting Cash and crediting a Loan/Note Payable when borrowing, then recording periodic payments by debiting both Interest Expense and the Loan/Note Payable (for principal reduction) and crediting Cash, using double-entry bookkeeping to keep debits and credits balanced for accuracy, impacting assets, liabilities, and equity over time.
What is the journal entry to record a loan from a bank, owner, related party, or any other entity that is unaffiliated with the company? When a company borrows money, they would debit cash for the amount of money received and then credit note payable (or a similar liability account).
Create a journal entry for the loan
The double entry to be recorded by the bank is: 1) a debit to the bank's current asset account Loans to Customers or Loans Receivable for the principal amount it expects to collect, and 2) a credit to the bank's current liability account Customer Demand Deposits.
If the loan is for daily operations, it's an operating expense. If it's for long-term assets like real estate or equipment, it's a capital expenditure. If it's managing existing debts, it falls under debt service.
A loan is not considered as income because the company is expected to pay that money back to the creditor overtime, meaning it is only reflected on the company's balance sheet. However, any interest that is accrued or paid on the loan during the period, goes in the income statement as an expense.
In financial terms, the debts that you owe are your liabilities. For example, If you buy a house and take a home loan, the house is your property and asset, while the loan you need to pay is your liability. Some forms of liabilities are loans, mortgages, bonds, deferred payments and accounts payable.
A loan is a liability: As you can see, if you take out a loan, that is money you owe to the bank, which makes it a liability.
There is however the golden rule to double entry bookkeeping in that every transaction has to have an equal and opposite transaction. Everything has to balance. Very similar to Isaac Newton's third law of motion. You must have an equal and opposite debit and credit.
It is recorded as an asset in the lender's books, specifically under the loan receivable journal entry in the general ledger. This entry tracks the outstanding loan amount and helps with accurate financial reporting. Just like other accounting processes, managing loan receivables requires a transparent approach.
In QuickBooks Online, you can set up a liability account to record the loan and its payments. This account tracks what you owe.
Classify the loan as a liability (not as owner's equity). Clearly label the entry, such as “Loan from Owner” or “Shareholder Loan”. Record loan details including amount, interest rate, repayment schedule, and maturity date. Track repayments carefully, noting each payment's date, amount, interest, and remaining balance.
Interest is an expense because it's essentially the cost of the loan itself.
Enter the amount of the loan and log the proper amounts to the appropriate expense accounts. In the following example, the Liability/Loan account is increased, or credited, while the appropriate expense accounts are decreased, or debited. In journal entries, the total of the Debit and Credit columns must be equal.
Seven common accounting journal entries include recording sales, paying expenses (like rent or salaries), purchasing assets (like equipment) or inventory, receiving cash, paying liabilities, owner investments/withdrawals, and end-of-period adjusting entries for things like depreciation or accruals, all following double-entry bookkeeping rules (debits/credits) to reflect business activities accurately.
In the Account dialog, select either Other Current Liabilities or Long Term Liabilities from the Account Type drop-down list, depending on the type of loan and its repayment time frame. In the Detail Type dropdown list, select either Other Current Liabilities or Long Term Liabilities. Enter a Name for the account.
The three golden rules of accounting are (1) debit all expenses and losses, credit all incomes and gains, (2) debit the receiver, credit the giver, and (3) debit what comes in, credit what goes out. These rules are the basis of double-entry accounting, first attributed to Luca Pacioli.
30 second summary | Double-entry bookkeeping keeps business finances accurate, but simple errors like mixing up debits and credits, misclassifying expenses, mistyping numbers, or failing to reconcile bank accounts can lead to inaccurate records and compliance issues.
These three golden rules of accounting: debit the receiver and credit the giver; debit what comes in and credit what goes out; and debit expenses and losses credit income and gains, form the bedrock of double-entry bookkeeping. They regulate the entry of financial transactions with precision and consistency.
How to record loans and loan payment journal entries
The long term borrowing (associated with note 4) is the first line item within the non-current liabilities. Long term borrowing is one of the most important line items in the entire balance sheet as it represents the amount of money that the company has borrowed through various sources.
Common misperceptions. A lot of people think of loans only as a liability, not an asset, because having a loan means you owe something. But to the person who is owed that money, the loan is an asset. Banks count loans as assets because they are a store of value for them.
Loans and gifts have significant implications for estate planning: Loans as Assets of Your Estate: The outstanding loan becomes an asset of your estate when you pass away.
Bank Loan Payments Category
Principal Repayment (Not an Expense): The principal portion of your payment is the return of the money you borrowed. This is not a deductible expense. Instead, it is a reduction of a liability on your company's balance sheet.
A loan may be considered both an asset and a liability (debt). When you initially take out a loan and it is received by you in cash, it becomes an asset, but it simultaneously becomes a debt on your balance sheet because you have to pay it back.