Loans and Borrowings — Accounting Entries
Learn how to record loans received, principal repayments, interest expenses,
accrued interest, loan instalments, lender fees, and the classification of
borrowings in financial statements.
A loan creates a liability, not revenue. Repayment of principal reduces the
liability, while interest is generally a finance cost. Interest may need to
be capitalised when the applicable accounting framework requires it for a
qualifying asset. These examples exclude taxes and assume ordinary borrowing
arrangements unless stated otherwise.
1. Business receives a bank loan
Situation: A business receives a term loan of ₹10,00,000 directly into its bank account.
| Account | Debit (₹) | Credit (₹) |
|---|---|---|
| Bank Account | 10,00,000 | — |
| Bank Loan Payable | — | 10,00,000 |
Why this entry? The business receives cash but also takes on an obligation to repay the lender.
Accounting logic: Bank balance increases with a debit; the loan liability increases with a credit.
2. Business repays loan principal
Situation: The business repays ₹1,00,000 of the outstanding loan principal from its bank account.
| Account | Debit (₹) | Credit (₹) |
|---|---|---|
| Bank Loan Payable | 1,00,000 | — |
| Bank Account | — | 1,00,000 |
Why this entry? The business settles part of its borrowing obligation.
Accounting logic: Principal repayment reduces both cash and the loan liability. It is not an expense.
3. Business pays loan interest
Situation: The business pays ₹20,000 in interest on its bank loan.
| Account | Debit (₹) | Credit (₹) |
|---|---|---|
| Interest Expense | 20,000 | — |
| Bank Account | — | 20,000 |
Why this entry? Interest is the cost of using borrowed funds.
Accounting logic: Recognise the interest cost in the appropriate period, subject to applicable capitalisation requirements.
4. Loan instalment includes principal and interest
Situation: The business pays a monthly loan instalment of ₹55,000. Of this, ₹40,000 is principal and ₹15,000 is interest.
| Account | Debit (₹) | Credit (₹) |
|---|---|---|
| Bank Loan Payable | 40,000 | — |
| Interest Expense | 15,000 | — |
| Bank Account | — | 55,000 |
Why this entry? A loan instalment commonly combines repayment of the amount borrowed with interest charged by the lender.
Accounting logic: Split the instalment using the lender’s repayment schedule. Do not record the entire instalment as an expense.
5. Interest has accrued but is not yet paid
Situation: At month-end, the business owes ₹12,000 in loan interest. The lender will collect it next month.
| Account | Debit (₹) | Credit (₹) |
|---|---|---|
| Interest Expense | 12,000 | — |
| Interest Payable | — | 12,000 |
Why this entry? The interest relates to the current accounting period even though payment will occur later.
Accounting logic: Recognise the expense and liability in the period in which the interest is incurred, subject to the applicable accounting framework.
6. Business pays previously accrued interest
Situation: The business pays the ₹12,000 interest payable recorded at the previous month-end.
| Account | Debit (₹) | Credit (₹) |
|---|---|---|
| Interest Payable | 12,000 | — |
| Bank Account | — | 12,000 |
Why this entry? The business settles an interest liability that was already recognised.
Accounting logic: Debit the payable and credit bank. Do not recognise the same interest expense a second time.
7. Business receives a loan from its owner
Situation: The owner lends ₹3,00,000 to the business under an arrangement that requires repayment.
| Account | Debit (₹) | Credit (₹) |
|---|---|---|
| Bank Account | 3,00,000 | — |
| Loan Payable to Owner | — | 3,00,000 |
Why this entry? The business receives funds that it must repay under the loan agreement.
Accounting logic: A genuine repayable loan is a liability, not capital. Keep it separate from owner contributions.
Important: The legal structure matters. Transactions between a company and its directors or shareholders may be subject to specific legal, approval, disclosure, and accounting requirements.
8. Business pays an arrangement fee for a loan
Situation: The business pays a lender an arrangement fee of ₹10,000 when obtaining a loan.
| Account | Debit (₹) | Credit (₹) |
|---|---|---|
| Loan Arrangement Fee / Applicable Loan Cost Account | 10,000 | — |
| Bank Account | — | 10,000 |
Why this entry? The business incurs a cost associated with arranging the borrowing.
Accounting logic: The final treatment depends on the applicable accounting framework and the nature of the fee. Certain transaction costs may be included in the initial measurement of a financial liability and recognised over the loan term using the effective interest method rather than expensed immediately.
9. Classify the portion of a loan due within the next 12 months
Situation: At the reporting date, ₹2,00,000 of a loan previously classified as non-current is due for repayment within the next 12 months. The applicable framework requires that portion to be classified as current.
| Account | Debit (₹) | Credit (₹) |
|---|---|---|
| Non-current Loan Payable | 2,00,000 | — |
| Current Loan Payable | — | 2,00,000 |
Why this entry? The business updates the balance-sheet classification to reflect the repayment timing.
Accounting logic: This is a reclassification, not a repayment. Total borrowings and profit remain unchanged.
Important: Apply the current/non-current classification requirements of the relevant accounting framework, including any specific rules for refinancing, covenant breaches, and rights existing at the reporting date.
10. Business settles the remaining loan balance
Situation: The business pays the final outstanding loan principal of ₹50,000 to the lender. Assume there are no additional fees or settlement charges.
| Account | Debit (₹) | Credit (₹) |
|---|---|---|
| Bank Loan Payable | 50,000 | — |
| Bank Account | — | 50,000 |
Why this entry? The business settles the remaining principal obligation.
Accounting logic: Clear the loan liability against the cash paid. If a settlement amount differs from the carrying amount, assess whether a gain, loss, fee, or other adjustment must be recognised.
Key accounting checks
- Reconcile loan balances with lender statements.
- Separate principal repayments from interest payments.
- Accrue interest at each reporting date when required.
- Do not record loan receipts as revenue.
- Do not record principal repayments as operating expenses.
- Review current and non-current classification at reporting dates.
- Review loan fees and borrowing costs under the applicable accounting framework.
- Maintain loan agreements, repayment schedules, and lender confirmations.