Key Concepts
A loan is a liability — money the business owes. Recording it follows the normal double-entry rules.
| Event | Debit | Credit |
|---|---|---|
| Obtain the loan | Cash at bank (+asset) | Bank loan (+liability) |
| Repay part of the loan | Bank loan (−liability) | Cash at bank (−asset) |
When the loan is taken, the cash goes into the bank account (asset increases), and the business now owes the bank (liability increases). When the business repays an instalment by cheque, the cash leaves the bank (asset decreases) and the amount owed falls (liability decreases).
The account name in the ledger vs the statement.In the journal and ledger, this liability is recorded in the Bank loan account. In the Statement of Financial Position, the same balance is presented under the line item Long-term borrowings (with any current portion shown separately). They are the same liability, just labelled for two different purposes.
Only the loan amount — also called the principal (or principal sum) — is recorded in the Bank loan account. The interest charged on the loan is recorded in a separate Interest expense account — covered in the next section.
Borrow → cash comes in, you owe more: Dr Cash at bank, Cr Bank loan. Repay → cash goes out, you owe less: Dr Bank loan, Cr Cash at bank. The Bank loan account is a liability, so it normally carries a credit balance — a credit increases it, a debit reduces it.
The cash comes into the bank, and the business owes the bank $80,000.
| Date | Particulars | Dr ($) | Cr ($) |
|---|---|---|---|
| 20X4 | |||
| 1 Mar | Cash at bank | 80,000 | |
| Bank loan | 80,000 |
One instalment of $20,000 is paid by cheque. The amount owed falls and cash leaves the bank.
| Date | Particulars | Dr ($) | Cr ($) |
|---|---|---|---|
| 20X5 | |||
| 28 Feb | Bank loan | 20,000 | |
| Cash at bank | 20,000 |
| Date | Particulars | Dr ($) | Cr ($) | Balance ($) |
|---|---|---|---|---|
| 20X4 | ||||
| 1 Mar | Cash at bank | 80,000 | 80,000 Cr | |
| 20X5 | ||||
| 1 Jan | Balance b/d | 80,000 Cr | ||
| 28 Feb | Cash at bank | 20,000 | 60,000 Cr | |
| 20X6 | ||||
| 1 Jan | Balance b/d | 60,000 Cr |
After the first repayment, the business still owes $60,000.
(At each 31 December year-end, part of this loan is due within the next financial year — we will handle that current-portion split when the loan is presented in the financial statements.)
Recording the loan on the wrong side. Obtaining a loan credits Bank loan (a liability increases) and debits Cash at bank. A common slip is to reverse the two.
Putting interest in the Bank loan account. The Bank loan account holds the loan amount only. Interest is a separate expense — never add it to the loan balance.
Crediting Cash at bank when the loan is obtained. When the loan is taken, cash comes in, so Cash at bank is debited, not credited.