The business receives a loan of £10,000 from a friend of the owner. The money is paid direct to the bank account of the business. It is important to understand that although the money is from a friend of the owner the loan is to the business.
How to Record a Loan
To record a loan, the accounting records will show the following bookkeeping entries when the business receives the loan:
Record a Loan – Bookkeeping Entries Explained
Debit – What came into the business
Cash came into the business bank account from the friend of the owner.
Credit – What went out of the business
The business now has a liability to repay the loan on the due date.
The Accounting Equation
The Accounting Equation, Assets = Liabilities + Capital means that the total assets of the business are always equal to the total liabilities of the business This is true at any time and applies to each transaction. For this transaction the Accounting equation is shown in the following table.
|Bank Current Account||=||Loan||+||None|
A separate loan account should be established in the balance sheet for each loan. The amount recorded is termed the loan principal.
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