## Overview

The company may need to borrow from the bank or other financial institutions to start or expand the business operation. Likewise, a proper loan received journal entry will be required at the comment that the company receives the cash of the loan.

Additionally, the interest on the loan will occur from the first day of receiving the loan. Hence, the company also needs to make the journal entry for the interest on the loan at the later date.

### At the date of receiving the loan

When the company receives the loan from the bank or other financial institutions, it can make the journal entry for the loan received by debiting the cash account and crediting the loan payable account.

Account Debit Credit
Cash \$\$\$
Loan payable \$\$\$

### Payment at the end of the period

When the company pays the loan installment at the end of the period, it can make the journal entry as below:

Account Debit Credit
Loan payable \$\$\$
Interest expense \$\$\$
Cash \$\$\$

## Example

For example, on Jan 1, 2020, the company ABC borrows \$100,000 of the loan with the interest of 6% p.a. for 10 years period from the bank. As it is the annuity loan, the company ABC is required to pay the loan installment of \$13,587 including both interest and principal at the end of the year for 10 years period.

What is the loan journal entry?

• on Jan 1, 2020, when the company receives cash from the bank for the loan
• at the end of the first year when the company pay the installment

Solution:

With the information in the example above, we can get the loan payment as in the table below:

 Year Loan balance Total payment Interest payment Principal payment 0 100,000 – – – 1 92,413 13,587 6,000 7,587 2 84,371 13,587 5,545 8,042 3 75,847 13,587 5,062 8,525 4 66,811 13,587 4,551 9,036 5 57,233 13,587 4,009 9,578 6 47,080 13,587 3,434 10,153 7 36,318 13,587 2,825 10,762 8 24,910 13,587 2,179 11,408 9 12,818 13,587 1,495 12,092 10 – 13,587 769 12,818

*Usually, the bank will provide the payment schedule as in the table. However, we can also calculate to get the \$13,587 of the installment of annuity loan with the excel formula of “-PMT (6%, 10, 100000, 0)”.

On Jan 1, 2020

When the company ABC receives the cash from the bank, it can make the loan received journal entry as below:

Account Debit Credit
Cash 100,000
Loan payable 100,000

At the end of the first year

When the company pays the loan installment at the end of the first year, it can make the journal entry based on the loan payment schedule as below:

Account Debit Credit
Loan payable 7,587
Interest expense 6,000
Cash 13,587

For the manual calculating, the \$6,000 of interest expense comes from the \$100,000 multiplying by 6% while the \$7,587 comes from the \$13,587 deducting \$6,000.

## Accrued interest on the loan

The interest expense is the expense that incurs throughout the passage of time. Hence, the company needs to account for the interest on the loan at the end of the period even though the payment is not required to be made yet.

Likewise, if the cash payment is not made yet, the company needs to make the journal entry for the interest on the loan payable at the end of the period as below:

Account Debit Credit
Interest expense \$\$\$
Interest payable – loan \$\$\$

For example, if the bank in the example above requires the company to make the first payment on Jan 1, 2021, instead, the company needs to make the interest on loan journal entry at the end of 2020 as below:

Account Debit Credit
Interest expense 6,000
Interest payable – loan 6,000

Then when the payment is made on Jan 1, 2021, the company can make the journal entry to eliminate the interest payable as below:

Account Debit Credit
Loan payable 7,587
Interest payable – loan 6,000
Cash 13,587

In this journal entry, there is no interest expense account as the company has already recorded the expense in 2020. Instead, the debit of \$6,000 interest payable is to eliminate the payable that the company has recorded at the end of 2020.