A business applies to a bank and receives a loan of 25,000. The money is paid direct to the bank account of the business.
The double entry bookkeeping journal entry to show the business receive a loan is as follows:
Receive a Loan from a Bank Journal Entry
The accounting records will show the following bookkeeping transaction entries to receive a loan from a bank.
| Account | Debit | Credit |
|---|---|---|
| Cash | 25,000 | |
| Loan | 25,000 | |
| Total | 25,000 | 25,000 |
Receive a Loan Journal Entry Explained
Debit
Cash has been received by the business and deposited into its bank account. The debit records the increase in the cash balance in the balance sheet of the business.
Credit
The business now has a liability to repay the lender (the bank) the money on the due date in accordance with the loan agreement. The credit records this liability in the balance sheet under the heading loan.
Accounting Equation – Receive a Loan
The accounting equation, Assets = Liabilities + Owners Equity means that the total assets of the business are always equal to the total liabilities plus the equity of the business This is true at any time and applies to each transaction. For this transaction the accounting equation is shown in the following table.
| Assets | = | Liabilities | + | Owners Equity |
|---|---|---|---|---|
| Cash | = | Loan | + | None |
| 25,000 | = | 25,000 | + | 0 |
In this case an asset (cash) increases as the money is received into the bank account of the business, and a liability (loan) increases representing the amount owed to the bank in accordance with the loan agreement.
A separate loan account should be established in the balance sheet for each loan. The amount recorded is termed the loan principal.
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About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years in all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a BSc from Loughborough University.