Loan received from bank journal entry
Overview
Sometimes, the company may receive a loan from a bank in order to operate or expand its business operation. Likewise, the company needs to properly make the journal entry for the loan received from the bank as the loan received from the bank will almost always comes with the interest payment obligation.
Hence, in addition to the principal payment obligation, the company needs to also recognize and record the interest incurred as a liability if the payment is not made at the time of closing the account.
Loan received from bank journal entry
Loan received journal entry
The company can make the journal entry for the loan received from the bank by debiting the cash account and crediting the loan payable account.
| Account | Debit | Credit |
|---|---|---|
| Cash | 000 | |
| Loan payable | 000 |
In this journal entry, both total assets and total liabilities on the balance sheet increase in the same amount.
Accrued interest journal entry
At the period-end adjusting entry, the company needs to record the accrued interest on the loan received by debiting the interest expense account and crediting the interest payable account.
| Account | Debit | Credit |
|---|---|---|
| Interest expense | 000 | |
| Interest payable | 000 |
This journal entry will increase both total expenses on the income statement and total liabilities on the balance sheet.
Interest payment on loan journal entry
When the company makes the interest payment for the loan, it can make the journal entry to eliminate interest payable it has recorded previously (if any) by debiting the interest payable account and crediting the cash account.
| Account | Debit | Credit |
|---|---|---|
| Interest payable | 000 | |
| Cash | 000 |
Loan payment journal entry
When the company pays back the principal of the loan received from the bank, it can make the journal entry by debiting the loan payable account and crediting the cash account.
| Account | Debit | Credit |
|---|---|---|
| Loan payable | 000 | |
| Cash | 000 |
Loan received from bank example
For example, on January 1, 2020, the company ABC receives a $50,000 loan from a bank with an interest of 8% per annum. The loan has the maturity of one year and the company requires to pay back both principal and interest at the end of the loan period which is on January 1, 2021. The company ABC closes its year-end account on December 31.
What is the journal entry for the loan received from the bank?
- on January 1, 2020
- on December 31, 2020
- on January 1, 2021
Solution:
On January 1, 2020
The company ABC can make the journal entry for the $50,000 loan received from the bank on January 1, 2020, as below:
| Account | Debit | Credit |
|---|---|---|
| Cash | 50,000 | |
| Loan payable | 50,000 |
In this journal entry, both total assets and total liabilities on the balance sheet of the company ABC will increase by $50,000.
On December 31, 2020
When the company ABC closes its account on December 31, 2020, it needs to record the accrued interest on loan received from the bank of $4,000 ($50,000 x 8%) and make the journal entry as below:
| Account | Debit | Credit |
|---|---|---|
| Interest expense | 4,000 | |
| Interest payable | 4,000 |
If this journal entry is not made, total expenses on the income statement will be understated by $4,000 and at the same time, total liabilities on the balance sheet will also be understated by $4,000 for the financial statements of 2020.
This is due to the interest expense incurs through the passage of time. Hence by the end of 2020, the company ABC has already incurred interest expense on the loan received from the bank of $4,000.
On January 1, 2021
On January 1, 2021, as the company ABC pays back both the principal and interest on the loan received from the bank, it can make the journal entry as below:
| Account | Debit | Credit |
|---|---|---|
| Loan payable | 50,000 | |
| Interest payable | 4,000 | |
| Cash | 54,000 |