Journal Entry for Shareholder Loan
Shareholder loan is the amount of money that company borrows from the shareholders.
Shareholders are the investors who own the shares in the company. They are simply the owner of the company. The amount share they own represents their ownership in the company. Shareholders have the right to vote in the general meeting to assign the board of directors who are making decisions regarding the dividend distribution, make directions for the company, and other strategies.
The company can raise funds from selling the equity or debt from investors. When a company raises capital by selling equity, it means the company sells part of its ownership to the new owner in exchange to get the capital. Investors will become the owner and receive gain/loss from the company. On the other hand, company can raise cash by borrowing it from banks or other creditors. The bank or creditors will not become the company’s owner, they will not impact by company profit or loss. The company has obligation to pay back the loan plus interest.
The shareholders expect the company to perform well and make a good profit. So they will be able to get a high dividend which is the return for shareholders. In addition, the share price will increase when the company is doing good. The shareholders will be able to sell the share for some capital gain.
In addition to the capital invested, some shareholders may provide additional cash in form of a loan to support the company. It will help the company in the growth stage when they really need cash to support the operation, increase working capital and so on. It also reduce the shareholders risk as the company has obligation to payback the loan. Moreover, it will not impact the equity structure of the company.
Journal Entry for Shareholder Loan
When the company receives money from a shareholder in form of loan, they have to record cash received and Shareholder loan.
The journal entry is debiting cash and credit loan from shareholders.
| Account | Debit | Credit |
| Cash | XXXX | |
| Shareholder Loan | XXXX |
The transaction will increase the cash balance on balance sheet. It also increases the shareholder loan in the liability section on balance sheet.
The company requires to disclose the shareholder loan in the financial note as it is the related party transactions.
Journal Entry for Shareholder Loan Example
ABC is a company that owns by several shareholders. The company is seeking new capital investment to expand the business. They are not willing to sell more shares which will dilute the share capital. Management team decides to seek the loan from various creditors.
Mr. A who is One of the shareholders decides to provide loan amount of $ 1,000,000 with an interest rate of 5% per year. The loan will be repaid after 5 years. Please prepare journal entry for shareholder loan.
The loan that Mr. A provide to ABC is considered as shareholder loan and it require to disclose in the financial note.
When ABC receive cash from Mr. A, accountants need to record cash and shareholder loan.
The journal entry is debiting cash $ 1,000,000 and credit shareholder loan $ 1,000,000.
| Account | Debit | Credit |
| Cash | 1,000,000 | |
| Shareholder Loan | 1,000,000 |
The cash on balance will increase by $ 1,000,000 and the loan from shareholder will increase the company long-term debt by $ 1,000,000.