A loan payable is a liability account (yellow) used to track the amount you owe to someone who has lent you money, including interest that accrues over time.
Example:
Your business takes out a $100,000 loan from a bank with a 7% annual interest rate.
Keep accurate Loan Records to track Principal, Down Payments, and Interest in Bkper:
Principal: The principal is the original sum of money borrowed in a loan. It does not include any interest or additional fees. For example, if you take out a loan of $10,000, this amount is your principal. If you pay it back in 10 installments, $1,000 corresponds to the principal portion of each installment.
Interest: Interest is the cost of borrowing the principal. It is usually expressed as a percentage of the principal over a specific period. For example, if the annual interest rate on a $10,000 loan is 5%, the interest for one year would be $500.
1. Create Accounts:
First, you'll need to create four accounts:
Asset Account (Bank account or Cash account): This account is where the loan becomes available to use for your business.
Liability Account (Loan Payable): This account tracks the outstanding balance of the loan.
Expense Account (Interest Expense): This account tracks the interest expense your business incurs on the loan.
Payment Account (split the principle from the expense): This account helps to easily reconcile the bank and the Loan account with corresponding statements.
2. Record the Loan:
Next, record the initial loan amount as a credit to the Loan Payable account and a debit to the Bank or Cash account.
3. Record Loan Payments (Periodically):
Here's how to record your loan payments in Bkper:
Record the total monthly payment: Record the entire monthly payment amount (including both principal and interest) as a debit to a dedicated Loan Payment Account.
Separate the principal amount and the cost of money (interest):
Next, credit the corresponding portions of the Loan Payment and:
Debit the "Loan" Account for the principal amount repaid. This reduces your outstanding loan balance.
Debit the "Cost of Money" (Interest Expense) Account for the interest portion of the payment. This tracks the cost of borrowing over time.
Hashtag: Use a hashtag #loan to easily filter the loan transactions from other transactions.
Cash-flow: Record future Loan payments to identify possible cash flow issues.
Tax implications: in many regions Interest expenses on business loans are typically tax-deductible. Therefor it can be important to separate the principle from the cost of money. Consult your tax advisor for specific guidance.