Loan Accounting Entries
In the business world, loans are a common way for companies to obtain financing for various purposes. This blog post will provide an in-depth overview of business loans in accounting, specifically focusing on loan accounting procedures.


We will cover a business loans, how they work, and what borrowers should consider. Additionally, we will discuss the accounting standards for businesses taking out loans in the UK, including the journal entry on how loans and interest payments are posted in the books of accounts. To help you gain a better understanding, we will also include relevant examples and case studies.
What is a Business Loan?
A business loan is financing a lender provides to a company for various purposes, such as starting a new venture, expanding operations, or purchasing equipment.
Business loans can be obtained from banks, credit unions, or other financial institutions. Depending on the repayment period and the borrower’s needs, they can be short-term or long-term loans.
A business loan and monthly payments are entered into the accounts by journal entry.
Terms for Business Loans
To help you understand some of the terms that are used for business loans, here is a list:
Principal loan is the amount borrowed from a lender and needs to be repaid.
Interest rate is the loan interest percentage added to the principal loan amount that needs to be paid back to the lender and is also called an interest payment.
Repayment period is the agreed-upon time frame for the loan to be repaid.
Monthly Loan Payment Amount This is usually a fixed rate you pay each month to the lender as agreed.
Loan Account A loan account records all the necessary accounting entries for a business loan and is a liability on the balance sheet.
How Do Business Loans Work?
When a company applies for a business loan, it must provide the lender with information about its financial situation, business plan, and intended use of the funds. The lender will then evaluate the company’s creditworthiness and determine whether to approve the loan.
Once the loan is approved, the lender will provide the funds to the borrower, who must repay the loan according to the agreed-upon terms. These terms typically include a repayment schedule, interest rate, and additional fees or penalties for late payments or early repayment.
Once the loan is set up, a journal entry will be created on the loan account and bank account. There will also be a journal entry for each payment for the amount repaid and the interest.
Accounting Standards for UK Businesses Taking Out Loans
The UK’s accounting standards for businesses taking out loans are governed by the Financial Reporting Council (FRC). The FRC sets out the Generally Accepted Accounting Practice (GAAP) in the UK, which includes the Financial Reporting Standard (FRS) 102. The FRS 102 guides how to account for financial instruments, including loans.
Loan Accounting- Journal Entry
When a business receives a loan, it should record the transaction in its books of accounts. The entry for the initial receipt of the loan would typically involve a debit to the bank account and a credit to the loan account, which is a liability.
As the business makes repayments on the loan account, it should also record the interest expense associated with the loan by journal entry.
This usually involves a debit to the interest expense account and a credit to the loan liability account.
At the end of each accounting period, the business should adjust the loan liability account for any accrued interest that has not yet been paid. This is done by creating a journal entry debiting the interest expense account and crediting the loan liability account.
How is a Journal Entry Recorded?
When you create entries to accounting software, the journal entries are recorded directly via posting different entries, including bank transactions and invoices. The chart of accounts should have all the categories required, including loan account, interest expense and bank. If they are not available, they are created manually.
There are several different ways a journal entry is recorded:
Direct Entry
The user creates a journal and posts it to the general ledger.
Bank Transaction
Using accounting software to record a bank transaction of money coming in or out of the bank. Bank transactions can either post manually or by using a bank feed.
Invoicing or Billing
You may issue or receive an invoice for the loan. This bill/invoice is posted to the loan account and either accounts payable or accounts receivable.
Download our free journal entry template.
Examples and Case Studies for Loan Accounting
Company A takes out a ÂŁ50,000 loan with a 5-year term, paying 500 monthly. The loan requires monthly repayments of both the principal loan and interest. There must be an equal credit entry in the accounting equation for each debit entry.
Bank Loan Received
When the bank loan is received, Company A will record the following journal entries:
- Debit Bank Account: ÂŁ50,000 – Asset Account
- Credit Loan Liability: ÂŁ50,000 – Liability Account
The loan accounting journal will look like this:


Monthly Payment for Principal loan
Each month, Company A would record the interest expense and principal repayment as follows:
Debit Interest Expense: (monthly interest amount)
Journal Entry
Debit Loan Liability Account: 500.00
Credit Bank Account: 500.00
Monthly Interest Payment Journal Entry
Debit Interest Expense: 50.00
Credit Loan Account: 50.00
Journal Entries for Purchase of an Asset
When the loan is used to purchase an asset, Company A will record the following journal entries:
Debit Asset Account: (the amount used to buy the asset)
Credit Accounts Payable Account
By following these accounting procedures, businesses in the UK can ensure that they accurately record and report their loans and related interest expenses per the applicable accounting standards.
Loan Accounting – Calculating Loan Interest
To accurately calculate the interest component, it is important to understand the different terms used in the calculation. The effective interest rate is the annual percentage rate (APR) of the loan and considers all fees and costs associated with taking out a loan. If it is a mortgage, there might be additional fees and loan interest.
The principal amount is the amount borrowed from a lender that needs to be repaid, while the interest is the additional cost associated with borrowing the money. Finally, the repayment period is the amount of time it will take to repay the loan in full.
Once these terms are understood, calculating the loan interest expense is relatively simple. Using our earlier example of Company A taking out a ÂŁ50,000 loan with an annual interest rate of 6%, we can calculate the interest expense as follows:
Interest Expense = Loan Principal Amount x Interest Rate x Repayment Period
= ÂŁ50,000 x 0.06 x 5 years
= ÂŁ15,000
Thus, Company A will have to pay a total of ÂŁ15,000 in interest throughout the loan repayment period.


Free Bank Loan Amortised Interest Template
Companies can use our free loan amortised interest template to help calculate loan principal interest payments. This template provides an easy-to-use calculator that breaks down each payment over the life of the loan, including the amount paid in principal and the amount paid in interest. It also includes a chart that displays the loan balance at each payment period for easy tracking of progress towards loan repayment.
Below is an example of 200,000 at 5% over 20 years and a monthly loan payment of 1319.91 per month.


Download our free Bank Loan Amortised Interest Template today. To use it, complete the green fields, including the loan amount, interest rate, date of 1st payment dd/mm/yyyy and monthly repayment amount. The Excel template will calculate the principal amount and interest paid each month. It will also display a total at the end of each year.
Download the free amortisation schedule below.
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Loan Accounting Journal Entry Conclusion
Loan accounting is used to accurately track and record loans for businesses in the UK to comply with accounting procedures. By understanding terms such as effective interest rate and repayment period, companies can calculate the interest expense associated with a loan annually.
We have shown examples of journal entries for loan receipts, principal and interest payments, as well as the purchase of an asset. We also provided a free Loan Amortised Interest template.