Available on: Accounting Basic, Accounting Premium | Accounting basis required: Modified Cash Basis or Accrual Basis (loan liability subtypes are not available on Cash Basis)
This article explains how to record a business loan in Patriot Accounting, including a loan used to buy a vehicle, trailer, or piece of equipment.
This is used as an example of general accounting principles, but you should always consult your accountant to determine the correct way to record a loan for your books.
Generally, recording a loan takes three parts: add a Liability account for the loan, add an Asset account for what the loan paid for, and record a journal entry that puts both balances on your books.
Step 1: Check Your Accounting Basis
Loan accounts use the Liability subtypes Current Liabilities or Long Term Liabilities. These Liability subtypes are only available if your accounting basis is set to Modified Cash Basis or Accrual Basis. If your accounting basis is Cash Basis, the only Liability subtype you will see is Sales Tax Payable.
To check or change your accounting basis:
Go to Settings > General Setup > Transaction Settings.
Under Accounting Basis, select Modified Cash Basis or Accrual Basis.
Click Save.
Step 2: Add a Liability Account for the Loan
A loan is money your business owes to a bank or lender, so a loan is always recorded in a Liability account. A loan is never recorded in Owner's Equity, even if you are the one who signed for the loan. Owner's Equity is only used for money you personally put into the business or take out of the business.
To add the loan liabilities account:
Go to Settings > Accounting Settings > Chart of Accounts.
Next to Liability, click Add New Account.
Enter a name for the loan account, such as "Trailer Loan" or "Truck Loan."
Select a Subtype: Long Term Liabilities if the loan will be paid off in more than one year, or Current Liabilities if the loan will be paid off within one year.
Leave the account marked Active.
Click Save.
Step 3: Add an Asset Account for What the Loan Paid For
If the loan was deposited into your business checking account as cash instead of being used to buy a specific item, skip this step. Your existing Checking account is the asset that received the money.
If the loan was used to buy a vehicle, trailer, equipment, or other property that your business will use for more than a year, that item is a fixed asset and needs its own Asset account.
To add the asset account:
Go to Settings > Accounting Settings > Chart of Accounts.
Next to Asset, click Add New Account.
Enter a name for the asset you received for the loan, such as "Trailer" or "Car."
Select the Subtype Fixed Asset.
Leave the account marked Active.
Click Save.
Step 4: Record the Loan and the Purchase in One Journal Entry
The best way to untangle the journal entry for recording a loan is:
The debit side answers "what did the business get?" (e.g., a car, equipment, etc.)
The credit side answers "where did the money come from?" (for the initial loan entry, the credit side is the lender, e.g., a bank.)
The journal entry records what the business received (the debit side) and where the money came from (the credit side). Debits and credits must be equal or the journal entry will not save.
To record the loan journal entry:
Go to Accounting > Financial Tasks > Journal Entry.
Enter the date you purchased the item or received the loan.
Enter a description, such as "Trailer purchase financed by bank loan."
Add the journal entry lines using the examples below that match your situation.
Confirm the total debits equal the total credits, then click Save.
Journal entry example: financed purchase with no down payment
Example: You bought a trailer for $20,000 and financed the full $20,000.
Account | Debit | Credit |
Trailer (Fixed Asset) | $20,000 |
|
Trailer Loan (Long Term Liabilities) |
| $20,000 |
Journal entry example: financed purchase with a down payment
Example: You bought a trailer for $20,000, paid $2,000 down from your business checking account, and financed the remaining $18,000.
Account | Debit | Credit |
Trailer (Fixed Asset) | $20,000 |
|
Trailer Loan (Long Term Liabilities) |
| $18,000 |
Checking (Bank account) |
| $2,000 |
Journal entry example: cash loan deposited into checking
Example: The bank deposited a $15,000 loan into your business checking account and you did not buy a specific item with the loan.
Account | Debit | Credit |
Checking (Bank account) | $15,000 |
|
Business Loan (Long Term Liabilities) |
| $15,000 |
How to Record Ongoing Loan Payments
Each loan payment has two parts: the principal, which reduces what you owe, and the interest, which is an expense. Your lender's statement shows how much of each payment is principal and how much is interest. Record each loan payment as a journal entry, or record this when you manage your bank transactions each month.
Journal entry example for recording ongoing loan payments with interest
Example: Your monthly trailer loan payment is $450, of which $400 is principal and $50 is interest.
Account | Debit | Credit |
Trailer Loan (Long Term Liabilities) | $400 |
|
Interest Expense (Expense) | $50 |
|
Checking (Bank account) |
| $450 |
If you do not have an Interest Expense account, you can add one at Settings > Accounting Settings > Chart of Accounts under Expense, or click +Add New beside the account dropdown while entering the journal entry.
Frequently Asked Questions About Recording Loans
Should a loan be recorded as Owner's Equity?
Not usually. A loan is recorded in a Liability account, not Owner's Equity, because a loan is money the business owes to a lender. Owner's Equity is only used when you personally invest your own money into the business or withdraw money from the business.
What account offsets the loan liability?
The account that offsets the loan liability is whatever the business received from the loan. If the loan was used for a vehicle, trailer, or equipment, the offset is that item's Fixed Asset account. If the loan was deposited into your bank account as cash, the offset is your Checking account. If part of the purchase was paid with a down payment, that portion is credited to Checking.
Why can't I find Long Term Liabilities as a subtype?
If the only Liability subtype available is Sales Tax Payable, your accounting basis is set to Cash Basis. Switch to Modified Cash Basis or Accrual Basis at Settings > General Setup > Transaction Settings, then return to the Chart of Accounts to add the loan account.
When does the initial fixed asset get removed from the Balance Sheet?
Paying off the loan does not remove the item from your Balance Sheet. It stays as a Fixed Asset until you sell or dispose of it.