Loan Given to Employee
Overview
Sometimes, the company may give the loan to employees for their emergency use or other reasons. Likewise, the company needs to account for the loan given to employees with the proper journal entry starting from the date that the company provides the loan.
Unlike advance salary, the amount of loan given to the employee is usually in a much bigger amount with the interest attached. Hence, the company also needs to account for interest accrued at the period end adjusting entry even when there is no cash flow involved at all.
Loan given to employee journal entry
At the date of giving the loan to employee
The company can make the journal entry for the loan given to employee by debiting the loan to employee account and crediting the cash account.
| Account | Debit | Credit |
|---|---|---|
| Loan to employee | 000 | |
| Cash | 000 |
Loan to employee account is the asset account on the balance sheet. Likewise, in this journal entry, one asset increases while another asset decreases; hence there is a zero impact on the total assets of the balance sheet.
Adjusting entry for accrued interest receivable
As the interest on loan given to employee increases through the passage of time, the company needs to record the accrued interest at the period end adjusting entry.
| Account | Debit | Credit |
|---|---|---|
| Interest receivable | 000 | |
| Interest income | 000 |
Receive interest payment from employee
Later, when the company receives the payment of the interest on the loan to employee, it can make the journal entry as below.
| Account | Debit | Credit |
|---|---|---|
| Cash | 000 | |
| Interest receivable | 000 |
Receive principal payment from employee
When the company receives the principal payment of the loan to the employee, it can make the journal entry to reduce or remove the loan as below:
| Account | Debit | Credit |
|---|---|---|
| Cash | 000 | |
| Loan to employee | 000 |
Loan given to employee example
For example, on Jan 1, 2021, the company ABC gives the $50,000 loan to its employee for emergency use. The loan has 24 months duration and the company ABC charges 0.5% as monthly interest (which is $250).
This interest will need to be paid to the company on the first day of each month during the loan period starting from Feb 1, 2021. The loan principal will be paid back in the total amount at the end of the loan period.
What is the journal entry for the loan given to employee?
- on Jan 1, 2021, when the company ABC gives the loan to employee
- on Jan 31, 2021, when the company makes the Jan 31 adjusting entry
- on Feb 1, 2021, when the company receives the first interest payment
- at the end of the loan period, when its employee pays back the total amount of loan principal
Solution:
On Jan 1, 2021
The company ABC can make the journal entry for the loan given to employee on Jan 1, 2021, as below:
| Account | Debit | Credit |
|---|---|---|
| Loan to employee | 50,000 | |
| Cash | 50,000 |
On Jan 31, 2021
The company ABC can make the journal entry for the accrued interest receivable on Jan 1, 2021, as below:
| Account | Debit | Credit |
|---|---|---|
| Interest receivable | 250 | |
| Interest income | 250 |
Without this journal entry, both total assets on the balance sheet as well as total income on the income statement will be understated by $250 for the Jan 2021 period.
On Feb 1, 2021
The company ABC can make the journal entry when it receives the interest on the loan to employee on Feb 1, 2021, as below:
| Account | Debit | Credit |
|---|---|---|
| Cash | 250 | |
| Interest receivable | 250 |
At the end of the loan period
The company ABC can make the journal entry when its employee pays back the total amount of loan principal as below:
| Account | Debit | Credit |
|---|---|---|
| Cash | 50,000 | |
| Loan to employee | 50,000 |