Journal Entries of Loan

Whether loan is given or loan is taken, it is must to record it in books because given loan is our asset and taken loan is our liability. Moreover on the basis of outstanding balance, interest is calculated and it is paid by borrower to lender. So, for knowing actual balance of loan outstanding, we need to pass journal entries.

In the Books of Borrower

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

Interest on Loan Payable Account Credit

3. When Borrower pays the interest to Lender 

Interest on Loan Payable Account Debit

Bank Account Credit

4. When Borrower repays his loan.

(a) If there is no interest liability on loan.

Lender's Loan Account Debit

Bank Account Credit

(b) If there is any interest liability on loan

(i)

Interest on Loan Payable Account Debit

Lender's Loan Account Credit

(ii)

Lender's Loan Account Debit ( Principle + Payable Interest)

Bank Account Credit

In the Books of Lender 


1. When loan is given by Lender

Borrower's Loan Account Debit

Bank Account Credit

( Logic :  Cash though banks will come in the business which is our asset. It is increase of asset in the business. So, Bank account Debit . Lender's Loan is our liability. It is increase in existed liability, so this account will credit. )


2. When Lender has right to get interest on given loan 

Interest on Loan Receivable Account Debit

Interest  Account Credit

3. When Lender receives interest from borrower

Bank Account  Debit

Interest on Loan Receivable Account Credit

4. When Borrower repays his loan.

(a) If there is no interest receivable on loan.

Bank  Account Debit

Borrower's Loan  Account Credit

(b) If there is any interest receivable  on given  loan

(i)

Borrower's Loan Account Debit

Interest on Loan Receivable Account Credit

(ii)

Bank  Account Debit ( Principle + Receivable  Interest)

Borrower's Loan Account Credit

Example 



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Accounting Education: Journal Entries of Loan
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