Journal Entry for Making Loan
Loan is a sum of money that is borrowed and then repaid over time, typically with interest. The creditor lends money to the borrower and expects to collect back the money plus interest.
Loans can be used for a variety of purposes, including buying a car, financing a home purchase, or paying for college expenses. There are two main types of loans: secured and unsecured. A secured loan is one that is backed by collateral, such as a home or car. An unsecured loan is one that is not backed by collateral. There are also two main types of lenders: banks and credit unions.
Banks are typically the largest source of loans, while credit unions are usually smaller and offer more competitive rates. When you take out a loan, you will be required to sign a promissory note, which is a legal document that outlines the terms of the loan. The most important term in the promissory note is the repayment schedule, which specifies when and how the loan will be repaid.
Loan payments typically include both principal and interest, and they are usually made on a monthly basis. The amount of interest you pay will depend on the interest rate on your loan, as well as the term of the loan.
There are a few things to consider when making a loan to a borrower. The first is the type of loan. There are many types of loans, each with its own terms and conditions. The creditor should provide the type of loan depending on the risk involved. The second thing to consider is the interest rate. Interest rates will vary depending on the type of loan, the length of the loan, and the creditworthiness of the borrower.
The third thing to consider is the repayment schedule. The repayment schedule should be clearly in the loan agreement. The creditors should access if the borrowers can afford the monthly payments. By taking these things into consideration, creditors can access loan risk and reduce the possibility of uncollectible loans.
Journal Entry for Making Loan
The company will record the loan as the assets on the balance sheet. It is the balance that company needs to collect back from the customers.
The journal entry is debiting loan receivable and credit cash.
| Account | Debit | Credit |
|---|---|---|
| Loan Receivable | 000 | |
| Cash | 000 |
The loan receivable will be recorded as assets on the balance sheet. It can be current or non-current assets depending on the expected collection period.
When the customer makes the payment, company needs to record cash and reverse the loan receivable. The journal entry is debiting cash and credit loan receivable.
| Account | Debit | Credit |
|---|---|---|
| Cash | 000 | |
| Loan receivable | 000 |
Example
Company ABC is making a loan to its business partner for $ 70,000. After 3 months, the business partner pays back the loan $ 70,000. Please prepare journal entry for making the loan and collect it back.
Company ABC gives loan to another entity $ 70,000, so it needs to record the loan receivable on balance sheet.
The journal entry is debiting loan receivable $ 70,000 and credit cash $ 70,000.
| Account | Debit | Credit |
|---|---|---|
| Loan receivable | 70,000 | |
| Cash | 70,000 |
When the business partner pays back the loan, ABC records cash received and reverses the loan receivable.
The journal entry is debiting cash $70,000 and credit loan receivable $ 70,000.
| Account | Debit | Credit |
|---|---|---|
| Cash | 70,000 | |
| Loan receivable | 70,000 |