Loan Service is one of the most popular loans services online. In this blog post, we will introduce a detailed article about what loans receivable are and how they can benefit your business.
What Is Loans Receivable?
Loans receivable is a general ledger item that contains the current balance of all loans outstanding to a lender by borrowers. This is the lender’s principal asset account.
A subsidiary ledger may be used to record the specifics of each outstanding loan, where the subsidiary ledger’s final balance corresponds to the main ledger’s loans receivable account’s ending balance.
How Do You Record a Loan Receivable in Accounting?
For all of its transactions, including loan receivables, a bank would utilize a method of accounting known as “Double Entry,” similar to that of the majority of businesses.
A double entry system necessitates a significantly more comprehensive accounting procedure, as each input corresponds to a second entry in a separate account.
Every “debt” must be accompanied by a “credit,” and vice versa. If the two totals for each do not match, an error has been committed.
A double entry method gives more precision (by catching errors faster) and is more successful at avoiding fraud or misuse of cash.
Let’s see an example of how a transaction involving loans receivable might be recorded.
Consider that you are a small business entrepreneur seeking a $15,000 loan to launch a bicycle firm. You’ve performed your due diligence, the bicycle business in your region is thriving, and you believe that the loan you incur will pose a little risk.
You anticipate modest revenues in your first year in company, but your business plan indicates consistent development.
You visit the branch of your local bank, fill out the loan application, and answer the required questions.
The manager evaluates your qualifications and financial standing before approving the loan with a monthly payback schedule and a suitable interest rate.
The entire loan must be repaid within two years. The funds are immediately placed into your checking account before you leave the bank.
The bank or creditor must accurately record this transaction so that it may be accounted for later and so that the bank’s books balance. The following entry is made in the general ledger of the bank by the manager:
- Debit Account. The $15,000 is charged against the “Loans” account. This indicates that the sum is deducted from the bank’s funds in order to pay you back.
- Credit Account. The sum is shown in this liability account, indicating that it must be repaid.
You, as the CEO of the bicycle firm, must also document this. Here’s how you would account for the $15,000:
- Debit Account. You would enter this loan payment into the business’s checking account. This raises your cash balance on your balance sheet and your spending availability. Consequently, a ‘debit’ account is sometimes known as a ‘cash’ account.
- Credit Account. Now you have an obligation, which must be documented here. Under “loan,” the $15,000 principle would be recorded. You must also mention any bank costs related with the transaction.
Why is it necessary to incorporate two bookkeeping procedures? Because these funds must be repaid.
If you make an entry that just shows $15,000 coming in but does not account for the reality that it must ultimately be paid back out, your books will appear to be much healthier than they actually are. The books do not also balance.
Is a Loan Payment an Expense?
Partially. The principal part of a loan payment is not considered a cost. The principle payment reduces a company’s “loans payable” and will be reported as a cash outflow on the Statement of Cash Flow by management.
Is a Loan an Asset?
A loan is an asset, but for accounting reasons, it will also be classified as a liability.
Consider obtaining a bank loan for your bicycle business. The business borrowed $15,000 and now owes $15,000 in debt (plus a possible bank fee, and interest). Let’s imagine that $15,000 was utilized to purchase a machine to manufacture bike pedals.
This machine is a firm resource whose worth should be highlighted. In reality, it will remain an asset long after the debt has been repaid, but keep in mind that its value will decrease each year. Each year’s financial reports should reflect this fact.
What Is the Difference Between Loan Payable and Loan Receivable?
The distinction between a loan payable and a loan receivable is that one is a liability and the other is an asset for a business.
This is an account for a liability. Throughout its existence, a corporation may owe money to the bank or even to another firm. This “note” may also encompass credit lines. Those numbers should be listed here.
This is a record of assets. If you are the lender, “Loans Receivable” provides the actual amounts of money that your debtors owe you. This does not include money already paid; only sums that are scheduled to be paid are included.
Paying Back Your oan
Consider a scenario in which you owe $60,000 in loans and have repaid $5,000 this month. This results in a $5,000 reduction to your cash asset account and a $55,000 reduction to your loan due amount. The situation becomes more difficult, however, when interest is considered.
Let’s assume that, out of the $5,000, $750 is used to pay interest instead of principle. Despite a $5,000 decrease in cash, debts payable are only reduced by $4,250.
The remaining $750 is sent to the journal account for interest expense. In contrast to the loan itself, interest is not recorded in your ledger until it is paid off.
Current or Long-Term
A loan payable or loan receivable is recorded as a current asset or current liability if it will be repaid in full within one year. A long-term liability or asset is any component of the debt that is due more than a year from now.
For example, if your company takes out a $200,000 mortgage on an office building to be repaid over 10 years, the firm will be responsible for $200,000 in debts. In the first year of the loan, $20,000 of that amount is a current debt. The remaining $180,000 is an obligation with a long duration.
The identical concept applies to loans receivable.
Loans Receivable And Bad Debts
The chance that a borrower would not pay back a loan is a challenge for lenders. A loans receivable account, similar to an accounts receivable entry, should be supplemented by a bad debt reserve, a counter account that forecasts the amount of loans receivable that would go unpaid.
Despite being asset accounts, contra accounts are negative. For example, let’s say your bank has $1.5 million in loans receivable, but you have reason to suspect that $300,000 in loans will go into default.
Instead of recording the cash as a liability, you record it in the contra account. This reveals to anybody reviewing your financial statements that you only expect to earn $1.2 million from the $1.5 million loans receivable asset account – valuable information for anyone analyzing the bank.
Loans receivable is an accounting word that relates to how lenders categorize the money due to them by their borrowers.
Individuals, banks, financial institutions, and private investors may serve as the lender. Loans receivables are recorded in the lenders’ accounting ledgers as monies still owed by the borrowers.
As with all accounting operations, this one is conducted in a straightforward and logical manner. The total amount of loans receivable does not include the interest payable by the borrower to the lender on the outstanding balance.