Using the example of a $2,500 rent expense, your second journal entry debits your regular bank account $2,500 and credits your PPP loan account $2,500. When you receive a loan, you increase your business’s funds and liabilities. To reflect this increase, debit an asset account (your bank account) and credit a liability account. Financial institutions account for loan receivables by recording the amounts paid out and owed to them in the asset and debit accounts of their general ledger.

How do you record loan journal entries?

  1. When loan is received by borrower. Bank Account Debit. Lender's Loan Account Credit.
  2. When Borrower is responsible for paying Interest on Loan. Interest Account Debit.
  3. When Borrower pays the interest to Lender. Interest on Loan Payable Account Debit.
  4. When Borrower repays his loan.

As an example, assume a construction company begins construction in one period but does not invoice the customer until the work is complete in six months. The construction company will need to do an adjusting journal entry at the end of each of the months to recognize revenue for 1/6 of the amount that will be invoiced at the six-month point. The purpose of adjusting entries is to convert cash transactions into the accrual accounting method.

What Is the Purpose of a Journal Entry?

This can provide valuable information to stakeholders, such as investors and creditors, about the company’s financial position and the nature of its obligations. The repayment of a secured or an unsecured loan depends on the payment schedule agreed upon between both the parties. A short-term loan is categorized as a current liability whereas the unpaid portion of a long-term loan is shown in the balance sheet as a liability and classified as a long-term liability.

Many businesses record interest accruals during the month-end closing procedures and include interest incurred to that month-end date. Record interest accrued for your PPP loan during your month-end closing process. Again, strongly consider separating your PPP funds for clearer recordkeeping. For example, your liability account could be called a PPP Loan Payable account.

Debit and credit accounts

An adjusting journal entry involves an income statement account (revenue or expense) along with a balance sheet account (asset or liability). To keep your PPP funds and transactions organized, consider setting up a separate bank account for the PPP loan money you receive. A separate account lets you easily show that your business used PPP funds for eligible expenses (e.g., payroll costs). Not to mention, a separate PPP loan account will help simplify the PPP loan forgiveness process. If the business is required to make repayments of $4,000 per month on the loan of $50,000. Since the firm is set to release its year-end financial statements in January, an adjusting entry is needed to reflect the accrued interest expense for December.

What Is the Journal Entry for When a Business Makes a Loan?

Get up and running with free payroll setup, and enjoy free expert support. Try our payroll software in a free, no-obligation 30-day trial. Best suited for very small businesses, Sage Business Cloud Accounting is also a good choice for freelancers and sole proprietors who want to manage business finances properly. Learn more about how Pressbooks supports open publishing practices. There will be two aspects as far as the accounting is concerned. Secured loans are loans backed with something of value that you own.

When to Use Debits vs. Credits in Accounting

And, you’ll credit your regular banking account (e.g., Checking), which is an asset account. You will increase (debit) your accounts receivable balance by the invoice total of $107, with the revenue recognized when the transaction takes place. Cost of goods sold is an expense account, which should also be increased (debited) by the amount the leather journals cost you.

To do this, debit your PPP Loan Payable account and your Accrued Interest Payable account. Regardless of if the loan is partially or fully forgiven, debit your PPP Loan Payable account and credit your Debt Forgiveness What Is the Journal Entry for When a Business Makes a Loan? account for any amount that is forgiven. Set a Debt Forgiveness account up as an other income account. Payroll expenses are a bit more involved than mortgage interest, rent, and utility expenses.

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