JOURNAL ENTRY FOR LOAN

In this article we will provide the information related to the Journal Entry for Loan. Recording loans, whether given or taken, is crucial for proper bookkeeping. Given loans are considered assets, while taken loans are liabilities.

Additionally, interest calculations are based on the outstanding loan balance, and these interest payments are made by the borrower to the lender.

Therefore, accurate journal entries are essential to track the loan’s actual outstanding balance.

 

HOW TO PASS JOURNAL ENTRY FOR LOAN

 

 

IN THE BOOKS OF THE BORROWER

 

1. When the Borrower Receives a Loan:

 

   Bank Account Debit

  

   Lender’s Loan Account Credit

 

   This entry is made when the borrower receives a loan. It debits the bank account, as cash comes into the business, and credits the lender’s loan account, representing the increase in the liability.

 

2. When the Borrower Pays Interest on the Loan:

 

   Interest Account Debit

  

   Interest on Loan Payable Account Credit

 

When the borrower is responsible for paying interest on the loan, this entry is recorded. It debits the interest account and credits the interest on loan payable account, reflecting the interest expense.

 

3. When the Borrower Pays Interest to the Lender:

 

   Interest on Loan Payable Account Debit

  

   Bank Account Credit

 

   This entry is made when the borrower pays the interest to the lender. It debits the interest on loan payable account, showing the reduction in the payable interest, and credits the bank account for the payment.

 

4. When the Borrower Repays the Loan:

 

   (a) If There Is No Interest Liability on the Loan:

 

       Lender’s Loan Account Debit

      

       Bank Account Credit

 

When the loan is repaid without any interest liability, this entry is used. It debits the lender’s loan account and credits the bank account.

 

   (b) If There Is Any Interest Liability on the Loan:

 

       (i) Interest on Loan Payable Account Debit

      

           Lender’s Loan Account Credit

 

       (ii) Lender’s Loan Account Debit (Principle + Payable Interest)

      

           Bank Account Credit

 

When there is an interest liability on the loan, two entries are made. The first debits the interest on loan payable account and credits the lender’s loan account. The second debits the lender’s loan account for the principal amount and the payable interest and credits the bank account for the repayment.

 

IN THE BOOKS OF THE LENDER

 

1. When the Lender Gives a Loan:

 

   Borrower’s Loan Account Debit

  

   Bank Account Credit

 

   This entry is used when the lender provides a loan. It debits the borrower’s loan account and credits the bank account, reflecting an increase in the bank’s assets and the borrower’s liability.

 

2. When the Lender Expects to Receive Interest on the Given Loan:

 

   Interest on Loan Receivable Account Debit

  

   Interest Account Credit

 

When the lender anticipates receiving interest on the given loan, this entry is recorded. It debits the interest on loan receivable account and credits the interest account.

 

3. When the Lender Receives Interest from the Borrower:

 

   Bank Account Debit

  

   Interest on Loan Receivable Account Credit

 

   This entry is made when the lender receives interest from the borrower. It debits the bank account for the interest received and credits the interest on loan receivable account.

 

4. When the Borrower Repays the Loan:

 

   (a) If There Is No Interest Receivable on the Loan:

 

       Bank Account Debit

      

       Borrower’s Loan Account Credit

 

 When the loan is repaid without any interest receivable, this entry is used. It debits the bank account for the repayment and credits the borrower’s loan account.

 

 

 

   (b) If There Is Any Interest Receivable on the Given Loan:

 

       (i) Borrower’s Loan Account Debit

      

           Interest on Loan Receivable Account Credit

 

       (ii) Bank Account Debit (Principal + Receivable Interest)

      

           Borrower’s Loan Account Credit

 

 When there is interest receivable on the given loan, two entries are made. The first debits the borrower’s loan account and credits the interest on loan receivable account. The second debits the bank account for the principal amount and the receivable interest and credits the borrower’s loan account.