Loan receivable is a term sued in banking for an asset account in a bank’s ledger which shows the amount owed by borrowers. The ledger of the lender has all the information and amount that is still unpaid by the borrowers. Like all other accounting processes, loans receivable are also done in a logical and clear manner.
How To Record a Loan Receivable in Accounting?
Banks use a double-entry system for all their transactions. This system requires a lot of book-keeping processes, where each entry made in the system has a corresponding entry as well.
This system gives more accurate results and it easily detects even minor errors. Moreover, it is useful in detecting any sort of scam or fraud.
Example of Loan Receiveable
Suppose you are a business owner and want to get a $20,000 bank loan for buying some stuff for your office use. You will go to the bank and fill out the loan form. The banker will ask you questions and check your business details to approve the loan.
You got the loan with the repayment in monthly instalments for two years. $20,000 is directly credited to your account.
The banker will record this particular transaction properly and he will check that the same amount is debited from the bank and credit to the borrowers’ account. If the amount is not the same, then it shows that there is some error.
Is a Loan Payment an Expense?
It can be considered as an expense partially but not fully. The interest on the loan balance is actually the expense. Other than the interest, there is no expense on part of the borrower.
Is a Loan an Asset?
A loan is considered to be a current asset but it is also listed as a liability separately.
Suppose, you took a loan of $20,000 from the bank for buying bike’s spareparts. The bank gave you $20,000 and now you have to pay them $20,000 in a given period of time along with the bank fee and interest. Now when the loan is paid back, you still have the bike’s spare parts and that are your assets. But they will also depreciate with passing time.