Journal Entry for Loan Receivable
Loan receivable is the amount of cash that company lends to the other parties and expects to receive back and interest.
Loan is the sum of money that one entity borrows from the creditor such as bank or creditors. The company needs to repay back the loan principal and interest. It will be classified as the loan payable or debt which is the liability on balance sheet. The company requires the capital to invest in new products, expand the business, and support daily operation at the beginning. The loan is one of the sources when they want to raise money.
The entity that lends money to the others parties is the creditors. They expect to collect the cashback and earn some interest as the profit over loan provide. The interest income will depend on the agreed interest rate between the creditor and borrower.
The loan will be recorded as a loan receivable on the creditor balance sheet. It is classified as the current assets if collect within a year after reporting date. If the loan receivable is expected to collect in more than a year, company needs to classify it as noncurrent assets on balance sheet.
The loan principal is classified as assets while the interest will become the revenue on the income statement. It will help the company to generate a return from the cash invested in the loan.
Journal Entry for Loan Receivable
When the owner issues loan to the borrower, they must record cash out and increase loan receivable on balance sheet.
The journal entry is debiting loan receivable and credit cash.
| Account | Debit | Credit |
| Loan Receivable | XXXX | |
| Cash | XXXX |
The loan receivable will increase and reduce cash amount on balance sheet.
When company collects the loan back from the borrower, they need to record cash increases and reduce the loan amount.
The journal entry is debiting cash and credit loan receivable.
| Account | Debit | Credit |
| Cash | XXXX | |
| Loan Receivable | XXXX |
The loan receivable will be removed from balance sheet and the cash increase reflect with amount receive from borrower.
However, the interest received from the borrower will impact cash balance and interest income on income statement.
The journal entry is debiting cash and credit interest income.
| Account | Debit | Credit |
| Cash | XXXX | |
| Interest income | XXXX |
The interest income will impact the income statement by increasing the company profit.
Journal Entry for Loan Receivable Example
Company ABC is a retail creditor that provides loans to the individual person with low interest and short term. On 01 Jan, ABC issued a loan $ 5,000 to Mr. A and expect to collect it back within 6 months. Both parties agree to charge an interest of $ 240 within this term. If Mr. A fails to make payment at the end of 6th month, ABC will charge an interest of 1% per month.
On 30 June, Mr. A payback both loan principal and interest base on the agreed term. Please prepare a journal entry for loan receivable.
On 01 Jan, ABC issued a loan to Mr. A for $ 5,000. So they need to record loan receivable and cash out.
The journal entry is debiting loan receivable and credit cash.
| Account | Debit | Credit |
| Loan Receivable | 5,000 | |
| Cash | 5,000 |
Loan receivable will increase by $ 5,000 on balance sheet. The cash is decreased by $ 5,000 which is the balance move out of company.
On 30 June, Mr. A payback the cash to ABC, they need to decrease loan receivable and increase cash.
The journal entry is debiting cash $ 5,000 and credit loan receivable.
| Account | Debit | Credit |
| Cash | 5,000 | |
| Loan Receivable | 5,000 |
The journal entry is increasing the cash and credit loan receivable from balance sheet.
Interest income journal entry
The company needs to calculate the interest income per month and record it every month. ABC earn $ 240 in 6 months, so the interest income is $ 40 per month.
So every month end, ABC needs to record interest income and accrued interest receivable. The journal entry is debiting accrued interest receivable $ 40 and interest income $ 40.
| Account | Debit | Credit |
| Accrue Interest receivable | 40 | |
| Interest income | 40 |
Accrued interest receivable will classified as the current assets on balance sheet.
The transaction needs to repeat for 6 months from Jan to June. By the end of June, the accrued interest will be equal to $ 240 ( $ 40 * 6 months).
On 30 June, Mr. pay the interest of $ 240, so ABC needs to reverse the accrued interest receivable and cash.
| Account | Debit | Credit |
| Cash | 240 | |
| Accrued Interest Receivable | 240 |