The Method for Recording Loans Payable in Accounting Books
A company may sometimes take a loan if it requires additional capital to improve its business. Loans payable refers to the amount owed by a business to a bank, NBFC, private lender, other financial institutions, or even other businesses. Recording loans payable properly is essential, and its accounting involves considering the receipt of the loan, repaying the principal amount, and the interest expenses if any.
The accountant must record loans payable in the account books as per the Double Entry Bookkeeping System. As per the rules, there must be both debit and credit entries; otherwise, the books will not balance properly. It is important to monitor the loan’s principal amount and the interest accrued and record it properly. Otherwise, the account books will not reflect the correct financial position of the company.
The Entries for Loans Payable in Your Books of Accounts
Loan payable is a liability account. Based on the loan payment period, loan payables can be classified as current or non-current liabilities. It is a current liability if the loan is short term, and it is a long-term liability if it is long-term debt. For example, if you have to pay a loan within three years, it is a non-current liability. After completing two years, it will be a current liability meaning it is a loan that is to be repaid within one year.
These are the accounting transaction required:
When the loan is received:
Upon receiving the amount from a lender, the liability for a loan is recognized.
The accounting entries are:
Debit cash at Bank account xxxx
Credit loan payable xxxx
You should calculate the interest on the loan amount outstanding, i.e., the principal amount due at that period. This outstanding amount changes on loan repayment or if another loan installment is received. Interest calculations should take into account such changes in the outstanding amount during that period.
The accounting entries for interest accrued are:
Debit the finance cost xxxx
Credit the interest due xxxx
After interest payment, you need to make this entry:
Debit the interest payable xxxx
Credit cash at bank xxxx
Interest is either of a fixed nature for the entire loan period or variable. Floating or variable interest changes as per the loan duration generally depending on the inter-bank borrowing rate. Fixed interest rates remain stable but are more expensive than floating rates.
When you make loan repayments, the number of loan payables in the financial statements reduce.
The accounting entries for loan repayment are:
Debit loan payable xxxx
Credit cash at bank xxxx
As an accountant, you must remember that recording loans payable in the accounts books must be done when you receive the loan, when interest accrues over time, during interest payment, and while repaying the principal amount. The accountant has to ensure that there are both debit and credit entries for each transaction. 3E Accounting’s team of experienced professionals provides a wide range of accounting services, helping companies record their daily transactions systematically. We are a leading Accounting service provider in India, helping all businesses, large or small, upkeep their account books and access their financial statements whenever they require. If you contact us, we can provide you with more detailed information regarding our accounting services.