Journal Entry for PPP Loan Forgiveness
Loan forgiveness is the process by which the creditor stops demanding the company pay back the loan. In short, the bank or creditor cancels the loan that issues to the customer.
Loan forgiveness (or PPP = Paycheck Protection Program) is the program that prepares by the SBA (Small Business Associate) to support the small business. SBA is the US government agency that provides support to small businesses and entrepreneurs.
Paycheck Protection Program (PPP) is the fund approved by the US government that aim to help small business, sole entrepreneurs, and self-employ who suffer from the impact of the pandemic. The US government approve the fund amount of $ 953 billion through this program to ensure these businesses continue to operate and pay their employees.
Eligible for Loan Forgiveness
To be eligible for the PPP loan forgiveness, the company must comply with the following condition:
- At least 60% of the loan is spent on the payroll
- The total loans are spent on payroll and other eligible expense
- The payroll and other compensation is remaining the same.
For the up to date reference please check this link:
Journal Entry for PPP Loan forgiveness
Currenty, there is no specific US GAAP that provide clear guidance for the for-profit entity that receives grant besides tax credit or revenue from a contract with the customer. So there is no proper accounting standard to reflect the PPP loan forgiveness.
Based on the fact of loan forgiveness, the government provides loans to support eligible small businesses which allow them to keep paying their employee and run their operation. It is similar to the government grant under IAS 20. If the grant is provided in form of fixed assets, the company has to record income in accordance with the assets depreciation expense. If the grant is provided to reimburse the expense, the company has to record the income in the same period to cost recognition.
In the PPP loan forgiveness, the government provides grants to business to pay for the payroll and other eligible expenses. It means the grant is to support the business expense, so it should be recorded in the same period as the expense. In other words, the business should record it as income after getting loan forgiveness.
When the company borrows money to support the operation, they record debiting cash and credit loan liability.
| Account | Debit | Credit |
|---|---|---|
| Cash | $$$ | |
| Loan Liability | $$$ |
After that, the company requested loan forgiveness. If they get approved, they have to revere the loan and record income.
| Account | Debit | Credit |
|---|---|---|
| Loan Liability | $$$ | |
| Other income – PPP loan forgiveness | $$$ |
Example
Company ABC is a small business, they have a loan from the bank of $ 100,000 to support the operation during the pandemic. The compnay has decided to apply for the PPP loan forgiveness and get approval. Please prepare the journal entry for PPP loan forgiveness.
The company ABC has received a loan from the bank of $ 100,000. The journal entry is debiting cash of $ 100,000 and credit loan liability of $ 100,000.
| Account | Debit | Credit |
|---|---|---|
| Cash | 100,000 | |
| Loan Liability | 100,000 |
The company has used the money to pay for the payroll and other eligible expenses. After that, they request PPP loan forgiveness. The journal entry is debiting loan liability of $ 100,000 and credit other income of $ 100,000.
| Account | Debit | Credit |
|---|---|---|
| Loan Liability | 100,000 | |
| Other income – PPP loan forgiveness | 100,000 |
They have to reves the loan from balance sheet as they have no obligation to pay back the loan. Moreover, they have to record other income as the cash is already paid for the eligible expense.
