Journal Entry for Loan Collection
Loan collection is the process that the company collects the cashback from the customers to settle the loan given.
A loan is a financial instrument that allows an individual or organization to borrow a sum of money from another individual or organization. The borrower has to pay back the loan, plus interest, over an agreed period of time. Loans can be used for a variety of purposes, including business expansion, working capital, and the purchase of assets such as property or equipment.
There are many different types of loans available, and the terms and conditions of each loan will vary depending on the lender and the borrower’s agreement. When taking out a loan, it is important to ensure that you understand all of the terms and conditions and that you are comfortable with the repayments. Failure to make repayments can result in serious financial consequences.
Banks and other financial institutions make money by providing loans to customers and then earning interest on those loans. This business model has been in place for centuries, and it continues to be a way for these entities to earn profits.
Loans can come from banks, credit unions, or other financial institutions, or they can be private loans from family or friends. The entity that provides the loan is known as the lender, and the person or business receiving the loan is known as the borrower. One of the ways that lenders make money is by charging interest on the loans given. Interest is a percentage of the total amount borrowed that the borrower agrees to pay back to the lender in addition to the original loan amount.
The creditors will record the loan receivable on the balance sheet when lending money to the borrower. When the borrower returns the cash, the creditor has to remove the loan receivable from the balance sheet.
Journal Entry for Loan Collection
The loan receivable will present on the balance sheet as the assets. It can be current or noncurrent assets depending on the agreed term. The company will record an increase in loan receivable and reduce cash balance when making loans to the borrower.
The journal entry is debiting loan receivable and credit cash.
| Account | Debit | Credit |
|---|---|---|
| Loan Receivable | $$$ | |
| Cash | $$$ |
The loan receivable will increase on the balance sheet while the cash is moved to the borrower.
On the due date, creditor collects cashback from the borrower. The company receives the cashback plus the interest and it needs to reverse the loan receivable.
The journal entry is debiting cash and credit loan.
| Account | Debit | Credit |
|---|---|---|
| Cash | $$$ | |
| Loan Receivable | $$$ |
The transaction will remove the loan receivable from the balance sheet. It needs to recognize cash on the balance sheet.
Note: We have excluded the interest income journal entry to simplify. If you want to read more about interest income please refer to this article.
Example
Company ABC has provided loan to the borrower amount $ 120,000. Six months later, the borrower pays back the loan. Please prepare the journal entry for loan collection.
The company has given loan of $ 120,000 to the borrower. It records the loan receivable and cash paid.
The journal entry is debiting loan receivable $ 120,000 and credit cash $ 120,000.
| Account | Debit | Credit |
|---|---|---|
| Loan Receivable | 120,000 | |
| Cash | 120,000 |
When the loan is collected, the company needs to remove it from balance sheet and recognize cash.
The journal entry is debiting cash $ 120,000 and credit loan receivable $ 120,000.
| Account | Debit | Credit |
|---|---|---|
| Cash | 120,000 | |
| Loan Receivable | 120,000 |
