Accounting Entries For Loan Receivables & Payables – Learn How To Treat Loan Notes, Interest Payments, Provision, Write Off & Convertible Loan QuickBooks
A loan is a debt instrument provided by an entity to another entity known as the borrower at an agreed interest rate, evidenced by a promissory note which specifies the principal sum, interest rate charged by the lender and period of repayment.
In treating Loan disbursement in your books of account, there are two sided entries to note: from an issuer’s perspective and a receiver’s angle. When it’s the latter the loan is payable but on the former, you tag it receivable.
Accounting Treatment For Loan Receivables
When you issue a loan note to a borrower, it is treated as an asset, which, if receivable under a year, is a current asset. In your book, CR your bank account, and DR asset account – Note receivable – with the amount advanced to the borrower.
On receipt of an agreed interest from the Notes, you DR your bank account and CR the interest income account ( to the income statement)
Additional Entries For Loan Receivables:
For the provision of the loan receivable – CR provision account and DR bad debt account.
For loan written off during the year – DR provision account ( if there was an initial provision) or bad debt and CR loan receivable account.
Accounting Treatment For Loan Payable
If on the other hand, you received a loan from a bank, the amount payable is treated as a liability, which could be short or a long term. To record loan payable, CR liability account & DR bank account with the amount received from a lender.
All interest and principal paid on the loan periodically will be treated as thus: CR your bank account and DR loan payable account with the amount calculated.
Accounting Treatment For Convertible Loan
Convertible loans stock is a type of debt the owner can convert to a specified number of shares in a company. Instead of paying an interest on this debt, you can opt for a dividend. In your book, such transactions are treated as thus: If it’s loan payable, DR loan payable account and CR equity share with the number of equity shareholding after applying a conversion ratio. But, for loan receivable CR loan receivable (asset) and DR investment account.
Hope you find this accounting treatment for loan payable and receivables useful? Read more tips on accounting treatment for business transactions here