Borrowing Money Journal Entry
Overview
Sometimes, the company needs to borrow from the creditor such as bank and other lenders in order to start the business or expand the business. Likewise, the company needs to make the borrowing money journal entry in order to account for the loan and other related liabilities that it needs to pay back in the future.
As the borrowing money that the company receives usually comes with the interest, the company needs to account for the interests expense for the period it occurs regardless of the payment have been made or not.
Borrowing money journal entry
The company can make the journal entry for the borrowing of money by debiting the cash account and crediting the loan payable account.
| Account | Debit | Credit |
|---|---|---|
| Cash | 000 | |
| Loan payable | 000 |
Loan payable account is a liability account on the balance sheet, in which its normal balance is on the credit side. Likewise, in this journal entry, both total assets and total liabilities on the balance sheet increase in the same amount.
Accrued interest for the borrowing journal entry
At the period-end adjusting entry, the company needs to account for accrued interest that have occurred during the period with the journal entry of debiting the interest expense account and crediting the interest payable account.
| Account | Debit | Credit |
|---|---|---|
| Interest expense | 000 | |
| Interest payable | 000 |
Interest expense is an expense account on the income statement while the interest payable account is a liability account on the balance sheet. Likewise, this journal entry will increase both total expenses on the income statement and total liabilities on the balance sheet.
Interest paid for the borrowing journal entry
When the company makes the payment for the interest on borrowing money, it can make the journal entry by debiting the interest payable account and crediting the cash account.
| Account | Debit | Credit |
|---|---|---|
| Interest payable | 000 | |
| Cash | 000 |
This journal entry is made to eliminate the liability that the company has recorded previously for the interest on borrowing money.
Journal entry for payment of borrowing money
When the company makes the payment back to the creditor or the bank for the borrowing money, 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 |
Borrowing money example
For example, on January 1, 2020, the company ABC borrows money of $100,000 from the bank with the interest of 8% per annum. The loan period is one year and the company is required to pay back both interest and principal of the borrowing money at the end of the borrowing period which is on January 1, 2021.
What is the borrowing money journal entry?
- On January 1, 2020, when the company ABC borrows money from the bank
- On December 31, 2020, when the company ABC closes its year-end account
- On January 1, 2021, when the company ABC pay back both interest and principal of the borrowing money
Solution:
On January 1, 2020
When the company ABC borrows $100,000 money from the bank on January 1, 2020, it can make the journal entry as below:
| Account | Debit | Credit |
|---|---|---|
| Cash | 100,000 | |
| Loan payable | 100,000 |
On December 31, 2020
When the company ABC closes its year-end account on December 31, 2020, it can make the journal entry to record the accrued interest of $8,000 ($100,000 x 8%) on borrowing money as below:
| Account | Debit | Credit |
|---|---|---|
| Interest expense | 8,000 | |
| Interest payable | 8,000 |
Without this journal entry, total expenses on the income statement and total liabilities on the balance sheet will be understated by $8,000 as of December 31, 2020.
On January 1, 2021
When the company ABC pays back both interest and principal of the borrowing money on January 1, 2021, it can make the journal entry as below:
| Account | Debit | Credit |
|---|---|---|
| Loan payable | 100,000 | |
| Interest payable | 8,000 | |
| Cash | 108,000 |
It is useful to note that the company may use the note payable account or borrowing account, etc. to record the borrowing money from the bank or other creditors. In that case, the journal entry of borrowing money will be the crediting of note payable account or borrowing account instead of loan payable account.
This is a normal case as the chart of accounts of one company is usually different from another company, especially when they are in different sectors or industries. Likewise, one company may have a loan payable account while another company may have only a note payable account.