How to Record a Loan
This article explains how to correctly account for a loan in Accounting. Keep in mind this is only offered as a suggestion. We advise you to consult with your own Accountant or Finance Committee when making any accounting decisions.
The first thing that to do is account for the initial purchase of the asset. If you are moving to ParrishSOFT Accounting from a prior system, the asset and loan liability accounts may already be in place so you won't need to worry about accounting for the initial purchase of that asset. However if you have just purchased an asset, you would need to account for the initial purchase of that asset.
The following journal entry will account for the initial purchase of the asset and the opening of the loan:
Debit the Asset account for the value of the loan plus any cash down payment
Credit the Liability account for the value of the loan plus any cash down payment
Note: most loans will include the cash down payment as part of the initial balance on the loan. So, on the journal entry if we enter just the balance shown on the loan documentation, when we record the down payment check, we would be recording it twice (the first time by omission). Whereas if we record the initial balance shown on the loan documentation plus the cash down payment on the journal entry, when you record the cash down payment check, it will bring the loan balance down to the same amount shown on your loan documentation.
To record the cash down payment as a check simply create a new bill, with the loan liability as the only line item for the bill. This will then reduce the loan liability by the amount of the down payment thereby correcting the loan liability account balance. You can then create a check for the down payment or use the Assign Check Number button to assign a manual check number.
When you record the monthly payment to the loan, it would be entered as a bill with the line items going to the loan liability and the interest expense account. The principal part of the payment would go to the loan liability account and the interest part of the payment would go to the interest expense account.
Then you can write a check to pay the bill or use the Assign Check Number button if you paid the bill electronically.