Journal Entry for Shareholder Loan
Shareholders are individuals or entities that own shares in a company. Companies can have different types of shareholders, including common shareholders, preferred shareholders, and institutional investors. Each type of shareholder has different rights and privileges. Common shareholders typically have voting rights and the ability to elect the board of directors, while preferred shareholders may have priority when it comes to dividends and asset liquidation.
Shareholders play an important role in a company’s governance and are typically involved in major decisions, such as whether to sell the company or issue new equity. Institutional investors are another important type of shareholder. These are typically large investment firms that hold shares in many different companies. Institutional investors often have significant influence over a company’s management and can impact major decisions.
A company may raise money from investors by selling shares of equity. These investors become shareholders in the company. In return for their investment, shareholders typically receive voting rights and the potential to earn dividends. Dividends are payments made to shareholders out of a company’s profits. They are often paid on a quarterly basis. If a company is doing well, the value of its shares may increase, allowing shareholders to sell their shares for a profit. However, if a company is not doing well, the value of its shares may fall, causing shareholders to lose money. Thus, investing in shares of equity is risky but can also lead to high rewards.
In addition to issuing shares to raise capital, companies can also borrow cash from their shareholders. This type of financing is known as a shareholder loan. Shareholder loans are often used by small businesses or startups that cannot qualify for traditional bank financing.
The loans are typically made by individual investors, although larger businesses may also borrow from institutional investors such as venture capitalists. While shareholder loans can provide much-needed capital, they also come with some risks if compare to equity. As a result, it is important for companies to carefully consider all of their financing options before taking out a shareholder loan.
Journal Entry for Shareholder Loan
The company shareholders can also be the creditor of the company. The shareholders may not want to risk the capital equity, but they can lend the money to the company with proper interest rates and terms.
The company has obligation to pay back the loan principal and interest based on the agreed term.
The journal entry is debiting cash and credit loan from shareholders.
| Account | Debit | Credit |
|---|---|---|
| Cash | 000 | |
| Loan from Shareholders | 000 |
The cash balance will increase on the balance sheet as the company receives it.
The loan to the shareholder must be recorded in a separate account and provide clear disclosure. It must include detail disclosure for transparency as it is a transaction with a related party.
Example
Company ABC is a trading company that sells varieties of goods in the market. The company has several shareholders who join to control the operation. One of the shareholders requests a loan from the company amount $ 100,000. The shareholder’s teams agree to borrow the money from that shareholder. Please prepare a journal entry for the shareholder loan.
The company has received cash $ 100,000 from the shareholder, but it is not the equity investment, but the loan from the shareholder. The company should record cash received with loan from shareholders.
The journal entry is debiting cash $ 100,000 and a credit loan from a shareholder $ 100,000.
| Account | Debit | Credit |
|---|---|---|
| Cash | 100,000 | |
| Loan from Shareholder | 100,000 |