PSA L&P - Journal Entry: How to Record a Loan

How to Record a Loan

This article explains how to correctly account for a loan in Accounting Ledgers & Payables. 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 Ledger & Payables module does not have depreciation functionality. For depreciation functionality, you must use the Asset Manager Module.
 
There are three parts to recording a loan:
  1. Recording the initial loan
  2. Paying/Recording the down-payment
  3. Paying/Recording the principal and interest

 

Recording the initial loan

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

*The cash downpayment will be accounted for through a bill payment transaction shown later.
loanjournalentryforfullamnt.jpgNote: most loans will include the cash down payment as part of the initial balance on the loan.  When the initial balance shown on the loan documentation plus the cash down payment is shown on the journal entry, recording the cash down payment check (shown below), will bring the loan balance down to the same amount shown on the loan documentation.

 

Paying/Recording the down payment

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 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 or Electronic Funds Transfer check number.
billreducesloanowed.jpg

 

Paying the principal and interest expenses

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 accounts. 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.
record_loan_interest_payment.jpg

Then you can write a check to pay the bill or use the Assign Check Number button if you paid the bill electronically.

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