The business receives a loan of 10,000 from a friend of the owner. The money is paid direct to the bank account of the business. It is important to understand that although the money is from a friend of the owner the loan is to the business.
How to Record a Loan
To record a loan, the accounting records will show the following bookkeeping entries when the business receives the loan:
Record a Loan – Bookkeeping Entries Explained
Debit – What came into the business
Cash came into the business bank account from the friend of the owner.
Credit – What went out of the business
The business now has a liability to repay the loan on the due date.
The Accounting Equation
The Accounting Equation, Assets = Liabilities + Capital means that the total assets of the business are always equal to the total liabilities 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.
In this example an asset (cash) is increased as the loan amount is paid into the bank account of the business. The increase in assets is matched on the other side of the accounting equation by an increase in liabilities (loan), representing the amount owed to the lender.
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 and has built financial models for 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 degree from Loughborough University.