How to Record a Business Loan on the Books

Knowing accounting terms is important.

All accounting entries fit into two groups: debit, which is money coming in, and credit, which is money going out. In addition, applying the money -- whether it is coming in or going out -- to the correct category is instrumental in how it will be viewed on reports that show the company's current financial position. For example, recording a payment to a contract employee for computer repairs would fall under the debit category as "Computer Repairs" and in the same entry as a credit to the bank account the check was drawn from. Each transaction requires two entries, in equal amounts, to balance the accounts.

Instructions

Know Your Accounting Terms

1. Know exactly what accounting terms are associated with the business accounts and where they apply. To avoid confusion, research any conflicting terms. Contact an accountant or book keeper to develop terms and categories specific to your company. Note the active terms associated with the business. If your company is a consulting firm, you will not employ inventory terms as would a manufacturing company. However, "office supplies" is a universal expense any company might use for the purchase of paper, pens and ink. Work with a qualified source to determine which terms work for your company.

2. List the business loan as a debit to the company's bank account in which it is deposited. Create a category for the type of loan received: personal loan, revolving loan, small business loan. Refer to this category when depositing money from the loan account into the business account. Contact your banker to determine the correct name of the loan to avoid any confusion on the books.

3. Pay back the loan by crediting the business account, the category under which checks are assigned. List the payment under the same category it is received under. Break out the interest paid in that transaction as a separate line item under the category of "interest." Submit the records to the accountant at the end of the period, based on your tax-paying frequency. Reporting periods vary by company and can be done monthly, quarterly or yearly. The Internal Revenue Service will acknowledge the interest portion as tax deductible and the money received as a loan, as opposed to revenue.

4. Contact your banker with any questions on the terms of the loan or any confusion on how to record it on the books. Be clear on where the money is coming from and where it is paid out.

References

• Accounting Coach: Home Page