The Steps to Recording Loans Receivable in Your Accounting Books
Loans receivable is the amount of money that a creditor has to receive from a debtor. Usually, the creditor is a bank or any other financial institution that gives the loan, and the debtor is an individual or a business organization that receives the loan. Recording loans receivable as per the Double Entry system of accounting helps maintain financial statements accurately, besides enabling the perfect balancing of accounting books.
Banks and other businesses in India employ the Double Entry Accounting System for all transactions, such as loans receivable. As per this system, all entries need to have a corresponding entry to another account. All ‘debits’ must have a matching ’credit’ and vice versa. In the end, the totals for each account have to balance. If they don’t, there has been a mistake in recording the transaction. This system of accounts helps you to detect mistakes quickly and provides accuracy to your accounting books.
How to Record Loans Receivable Properly in the Books of Accounts
Let us learn how to record loans receivable with the help of an example. Let us assume that as a business owner, you are doing well but need Rs. 50,000 to boost your business. The bank approves the loan after verifying your credentials and fixes monthly instalments that you need to pay with monthly interest for two years till the loan is repaid. The bank deposits the amount directly into your account.
Here the bank is the creditor, and it needs to record this transaction precisely so that its accounting books are accurate and properly balanced.
This is how the bank records the transaction:
Debit account: The bank’s accountant debits the amount in the customer’s Loan account. This implies that the bank’s cash reduces when they credit the loan to your account
Credit account: The bank credits the loan amount as loans receivable. The amount also comes under the liability side of the bank’s balance sheet under the head ‘Loans receivable’, denoting that the amount is to be received by the bank
This is how you, as the owner of your company, need to record the transaction:
Debit Account: You have to debit the loan amount received in your bank book. As a result of this entry, your cash or bank balance increases in the asset side of the balance sheet
Credit Account: You have to record the amount in the loan account mentioning any bank fees if there are any
Here two entries are necessary since you have to show the loan amount received and also make sure that it has to be paid back to the bank.
As a businessman, you have to maintain your financial statements’ accuracy by recording loans receivable appropriately under the proper accounting heads as per the Double Entry System. 3E Accounting offers comprehensive accounting services to all types of businesses in India at reasonable rates. We are a leading, experienced Accounting firm in India, and we help businesses record all their transactions systematically and gain access to financial statements whenever required. By taking care of their repetitive accounting tasks, we help companies focus on their other core business operations. If you require additional information about our bookkeeping services, please contact us at the earliest.