Journal Entry for Loan Taken from a Person
A loan is a form of debt financing in which a borrower receives money from a lender, typically a bank, and agrees to pay back the loan with interest. Companies may take out loans to finance their operations, such as purchasing equipment or expanding their business.
When a company takes out a loan, it becomes a debtor to the lender. The lender charges interest on the loan, which is the cost of borrowing money. The company records the loan and the interest on its balance sheet as a liability.
The amount of interest that a company pays on a loan depends on the interest rate, the length of the loan, and the borrower’s creditworthiness. The repayment period for a loan can be short-term or long-term (more than a year).
It is important for companies to carefully consider the amount of interest they will pay on a loan before taking it out. Interest expense can have a significant impact on a company’s financial health.
If a company takes out a loan for a period of more than one year, the entire loan amount will be classified as a long-term liability. However, if the loan agreement specifies that a portion of the loan is due within one year, then that portion of the loan will be classified as a short-term liability.
The classification of loans as long-term or short-term is important for financial reporting purposes. Long-term liabilities are reported on the balance sheet as a separate line item from short-term liabilities. This allows investors and creditors to get a better understanding of a company’s financial obligations and its ability to meet those obligations.
Journal Entry for a loan taken
The cash account is debited when the loan is taken and the loan payable account is credited. This creates a liability on the balance sheet and the cash is recorded as debt.
The journal entry for the loan taken should be made as soon as the loan is taken and the required documents are signed. This is important to keep an accurate record of the loan and to ensure that the loan is properly accounted for.
The journal entry is debiting cash and crediting loans payable
| Account | Debit | Credit |
|---|---|---|
| Cash | XXX | |
| Loan Payable | XXX |
The cash balance will increase on the balance sheet alongside the loan payable which will be present in the liability section.
Example
Company ABC is raising capital to support its operation. The management has decided to take a loan amount $ 200,00 from Mr. A. The loan will be repaid within 5 years with an interest of 9% per year. Please prepare a journal entry for loan taken from Mr. A.
Company receives cash $ 200,000 from Mr. A, so it needs to record cash on the balance sheet. At the same time, company needs to record liability as well.
The journal entry is debiting cash $ 200,000 and credit loan payable $ 200,000.
| Account | Debit | Credit |
|---|---|---|
| Cash | 200,000 | |
| Loan Payable | 200,000 |