Journal entry for loan payable

Introduction

In accounting, loan payable is a liability that occurs when we take the loan from the creditor. In this case, we need to make the journal entry for loan payable in order to account for the cash that we receive as a result of taking a loan as well as to account for the liability that exists at the time of receiving the cash money.

In business, we may need to take a loan from a creditor such as a bank in order to start or expand our business. And such loan usually comes with interest that we need to pay together with the loan principal at the end of the maturity of the loan or at certain dates during the loan period.

In this case, we also need to record the interest on the loan payable during the loan period in order to account for the interest expense that occurs due to the existence of the loan payable.

Journal entry for loan payable

Loan payable

We can make the journal entry for loan payable by debiting the cash account and crediting the loan payable account.

This journal entry will increase both total assets and total liabilities on the balance sheet as a result of receiving the cash for the loan taken from the creditor.

Accrued interest on loan payable

Later, we may need to record the accrued interest on the loan payable if we make the period-end adjusting entry before the date of paying the interest. This is because the interest expense occurs through the passage of time.

Hence, we need to record the interest expense at the period end adjusting entry in order to account for the interest expense that has already occurred as well as the interest liability that has already existed.

In this case, we can make the journal entry for the accrued interest on the loan payable with the debit of the interest expense account and the credit of the interest payable account.

This journal entry is made at the period end adjusting entry when there is an accrued interest on the loan payable and we have not paid for it yet. This is to avoid both the understatement of total expenses on the income statement and the understatement of total liabilities on the balance sheet.

Payment of interest on loan payable

When we make the cash payment for the interest on the loan payable, we can make the journal entry to clear the interest payable that we have recorded previously with the debit of the interest payable and the credit of the cash account.

Loan payment

At the end of the loan period, we can make the journal entry for the loan payment by debiting the loan payable account and crediting the cash account.

This journal entry will remove the loan payable (partial or all) from the balance sheet. Likewise, the journal entry will decrease total liabilities as well as total assets on the balance sheet for the cash outflow (credit) from the business.

Loan payable example

For example, on January 1, 2022, we obtained a $10,000 loan from the bank with an interest of 10% per annum in order to expand our business operations. The loan has a one year maturity in which we need to pay back both the interest and principal on January 1, 2023.

In this case, we can make the journal entry for the loan payable on January 1, 2022, by debiting the $10,000 to the cash account and crediting the same amount to the loan payable account.

January 1, 2022:

In this journal entry, both total assets and total liabilities on the balance sheet increase by $10,000 as a result of taking a $10,000 loan from the bank.

Later, on December 31, 2022, when we make the period-end adjusting entry to close the company’s accounts, we can make the journal entry for the $1,000 ($10,000 x 10%) of the accrued interest on the loan payable that we obtained with the debit of the interest expense account and the credit of the interest payable account.

December 31, 2022:

This journal entry of accrued interest expense is necessary to avoid a $1,000 understatement of the expenses on the income statement as well as an understatement of the same amount on liabilities of the balance sheet.

Then when we make the $11,000 cash payment to the bank for both the principal and interest of the loan payable on January 1, 2023, we can make the journal entry as below:

January 1, 2023: