To correctly record a loan in a general ledger, you need to understand both the initial loan amount and the corresponding entries that affect both assets and liabilities. Here’s a step-by-step guide:
Record the Initial Loan Proceeds:
Debit: Cash/Bank Account – This entry increases your cash or bank balance as you receive the loan amount.
Credit: Loan Payable (Liability Account) – This entry records the amount owed, increasing your liabilities.
Record Loan Payments:
When you make a payment on the loan, it involves both interest and principal repayment. Each part needs to be recorded separately:
Debit: Loan Payable – Reduce the loan liability by recording any principal payment.
Debit: Interest Expense – Recognize any interest incurred during the period, reflected as an expense.
Credit: Cash/Bank Account – Decrease your cash or bank balance by the total amount of the loan payment (principal + interest).
Adjusting Entries/Accruals:
If interest is accrued but not yet paid at the end of an Accounting period, you should make an adjusting entry:
Debit: Interest Expense – Record the interest for the period as an expense.
Credit: Accrued Interest Payable – Recognize any interest that has accrued but not yet been paid as a liability.
Amortization Schedule:
Maintain an amortization schedule to track principal and interest components of each payment over the life of the loan. This aids in ensuring accurate interest and principal allocation in your general ledger.
By following these steps diligently, you ensure that your general ledger accurately reflects your financial status concerning the loan, maintaining the integrity and accuracy of your financial records.
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