A loan journal entry can be recorded in different ways in bookkeeping software, here are three of them:
When you use bookkeeping software you don't usually see the automatic journal entries that happen in the "background" when reconciling your bank accounts.
Entering a manual journal is handy for adjusting your books without affecting the bank accounts, like when you need to move a transaction from one account category to another like with the loan forgiveness.
The examples on this page are for both automatic journals involving the bank account and for manual entering of journals.
Every loan journal entry adjusts the value of a few account categories on the general ledger.
The account categories are found in the chart of accounts.
Bank loans enable a business to get an injection of cash into the business.
This is usually the easiest loan journal entry to record because it is simply receiving cash, then later adding in the monthly interest and making a regular repayment.
Debit: Bank Account (asset account) Credit: Loan (liability account)
Debit: Loan (liability account) Credit: Bank (asset account)
To learn more about assets and liabilities go to accounting balance sheet.
The figures from the above examples are based on the figures in the Loan Amortization image in the next
section about loan interest.
Debit: Loan Interest (expense account) Credit: Loan (liability account)
The bank may be able to provide a schedule listing all expected repayment dates and amounts for the life of the loan.
If you are unable to get a schedule from the bank you may be able to see the amount of interest in the online bank transactions or off your loan statement for the current or previous months.
You can also find a Loan Amortization template in Microsoft Excel templates and enter the loan details from the bank to calculate your own schedule as in this example:
If you use a schedule like this, compare it to your loan account each month to ensure it is tracking as expected.
A car is an asset so the journal entry for it will be similar for the purchase-via-loan of other assets like workshop equipment.
The difference between bank loans and vehicle loans is that:
These car journal entries are for a vehicle costing $15,000 and for a loan of 5 years at 12% with fortnightly payments – calculated using the same Loan Amortization template mentioned above.
This example is based on the purchase of a car from a car sales business, which business signs you up with a loan provider. They will give you an invoice for the car and documents for the loan so you can get the information you need from those documents.
Debit: Vehicle (asset account) Credit: Accounts Payable (liability account)
Using the Accounts Payable account in the above journal entry means that the invoice has not been paid with your bank funds.
The loan will offset the Accounts Payable and you will monitor the balance owing through the loan liability account, not through the accounts payable account.
Two accounts are debited on this loan journal entry:
Debit: Accounts Payable (asset account) ,
Debit: Administration Costs (expense account) - shows on the Profit and Loss report
Credit: Vehicle Loan Account (liability account)
Loans usually come with some kind of administration cost so this has been included in the journal. This type of cost is a deductible business expense.
Debit: Loan Interest Expense (expense account) Credit: Vehicle Loan(liability account)
Debit: Vehicle Loan(liability account) Credit: Bank (asset account)
These journals occur when two or more businesses are owned by the same owner/s.
If one business is low on funds the owner might use funds from the other business bank account to pay bills due to stakeholders (vendors) or for other expenses.
Sometimes, the owner might transfer a lump sum from one business to the other for the same purpose - there may be a loan agreement drawn up or there may not be.
I am working with two types of transactions:
The two companies in this example are:
These are purely fictional names not based on any real business that I know about.
Best Boots buys an office printer for Designer Doors for $220.00.
Debit: Designer Doors Loan Receivable(asset * account) Credit: Bank (asset account)
*This loan entry goes to assets because cash is expected to be received into the bank.
This journal puts the printer into the Profit and Loss Report of Designer Doors but shows that it was paid for by Best Boots.
Debit: Office Equipment (expense account) Credit: Best Boots Loan Payable (liability account)
There is no bank account involved in this journal.
Whether this is paid in full or only partly paid, the journal is the same:
The repayment of the expense loan by Designer Doors out of their bank account to Best Boots:
Debit: Best Boots Loan Payable (liability account) Credit: Bank (asset account)
The repayment of the expense loan into Best Boot's bank account:
Debit: Bank (asset account) Credit: Designer Doors Loan Receivable (asset account)
This is for a straight transfer of cash of $1,200 to from Best Boots to Designer Doors without a loan agreement and without interest; the business owner decides to repay it with $300 per month for 4 months.
Debit: Designer Doors Loan Receivable (asset account) Credit: Bank (asset account)
Debit: Bank (asset account) Credit: Best Boots Loan Payable(asset account)
This was a question that was emailed to me on how to account for a PPP Loan Forgiveness.
I am using this article by Stambaughness.Com for the basis of a PPP loan forgiveness, but these examples will work with most any type of loan forgiveness.
There are two different scenarios - you must chose one:
My example is for a loan of $3,000 which was originally allocated to the Loan liability account.
Scenario 1: allocating the amount to Other Income
The aim here is to move the loan away for the full $3,000 from the balance sheet liability to Other Income on the Profit and Loss.
Result: This will show an extra profit of $3,000 in the month you have chosen to record the loan forgiveness.
Scenario 2: offsetting the amount to Expenses
The aim here is to move the loan away gradually from the Balance Sheet liability to the Profit and Loss Report by offsetting the cost of relevant expenses as they occur.
This does two things:
Every time you pay for an expense in whatever month that the loan is allowed to offset, do the above steps until the loan is back down to 0.00.
In the example journal, $1,000 has been offset to wages. For this fictitious business it may be that another $1,000 is offset in the next month, and then again in a third month, finally showing a nil loan balance on the balance sheet.
Result: this provides a more balanced approach to increasing monthly profit results rather than a wham of $3,000 in one month like Scenario 1.