Journal Entry for Cash Received from Debtors
The company receives cash from the debtor to settle the outstanding loan on the balance sheet.
A loan is a debt provided by one party (the lender or creditor) to another party (the borrower or debtor). The loan is attached with the interest rate and supported by a promissory note which specifies the principle and payment term.
Common types of loans include mortgage loans, car loans, home loans, credit cards, installment loans, and payday loans. The recipient (i.e., the borrower) incurs a debt and is usually liable to pay interest on that debt until it is repaid. The payment includes the principal amount borrowed and interest.
The document evidencing the debt will normally specify the principal amount of money borrowed, and the interest rate the lender/borrower charges or pays on that amount. So this company provides loans to their customers with an agreed document as evidence. The borrower has the obligation to settle the loan based on the agreed term.
Cash flow is one of the most important aspects of any business. It is the money that comes in and goes out of a company, and it plays a vital role in keeping the business running smoothly. To maintain a healthy cash flow, businesses need to track their income and expenses carefully and make sure that they have enough money coming in to cover their outgoing costs. Without a healthy cash flow, businesses can quickly find themselves in financial trouble.
Collecting money from debtors can be a challenge for any company, large or small. In many cases, debtors are simply unable or unwilling to pay what they owe. As a result, companies must work hard to collect the money that is owed to them. This can involve everything from sending reminder letters to calling debtors on the phone. In some cases, companies may even hire collections agencies to help them collect the money that is owed.
While it can be difficult, collecting cash from debtors is an essential part of running a business. Without effective collection efforts, companies would quickly become overwhelmed by unpaid bills.
Journal Entry for Cash Received from Debtors
The company that provides loans to the customers is called the creditors. The customers are called the debtors.
When loaning to the debtors, the company will record loan or advance on the balance sheet. Loan is the assets that can be current or non-current depending on the agreed term. Another side of the transaction will impact the cash account.
The journal entry is debiting Loan or advance and credit cash.
| Account | Debit | Credit |
|---|---|---|
| Loan or Advance | 000 | |
| Cash | 000 |
When the debtor makes a payment back, company needs to record cash received and reverse the loan account.
The journal entry is debiting cash and credit loan or advance.
| Account | Debit | Credit |
|---|---|---|
| Cash | 000 | |
| Loan or advance | 000 |
Note: The cash received from the debtor may be higher than the amount of loan due to the interest income. We have not included the treatment of interest income which will be illustrated in another article.
Example
The company has loaned the money amount $ 45,000 to the customer. After a month, the debtor makes a payment back. In addition to the principle, the debtor also pays $ 5,000 as interest to ABC. Please prepare a journal entry for cash received from debtor.
When the company provides loan to the customer, it records the loan on balance sheet.
The journal entry is debiting loan $ 45,000 and credit cash $ 45,000.
| Account | Debit | Credit |
|---|---|---|
| Loan or Advance | 45,000 | |
| Cash | 45,000 |
One month later, the debtor pay back the loan plus the interest $ 5,000. So ABC received cash $ 50,000 from the debtor.
The journal entry is debiting cash $ 50,000 and credit loan $45,000, interest income $5,000.
| Account | Debit | Credit |
|---|---|---|
| Cash | 50,000 | |
| Loan | 45,000 | |
| Interest Income | 5,000 |
The transaction will increase cash $ 50,000 on balance sheet. It also reverses the loan and records interest income on the income statement.