How to manage loan payment journal entries (2024)

In business, things move fast. And when they move, you’ve got to track them. This includes anything and everything related to finances: like loan payments.

But where to start? What to record? How to record? And what is a journal entry in the first place?

You’ve got lots of questions, and we’ve got lots of answers. All explained simply and quickly so you can get back to doing what you do best: running your business like a boss. Which, in case you forgot, you are.

Many small businesses have taken out loans. Sometimes, a loan is how you get your company up-and-running in the first place, and other times, loans are required for business decisions that need to be made, like a strategic pivot or an expansion.

Loans can be either short-term or long-term. A short-term loan means repayment occurs in less than a year. Long-term loans are repaid in over a year’s time.

In this blog, when we say “loans,” we mean both loans received and the loan payments themselves. These take four steps to record.

Let’s begin.

Recording the initial loan is the first step of the payment process. This is an official record within your accounting software. It shows that you’ve received the loan, and outlines the loan liability.

For instance, if your loan is short-term, you would record it as a current liability. If it’s a long-term debt, it’s incurred as a long-term liability.

Recording your loan accurately is an important part of this process. To do so, you’ll enter a “debit” to the “cash account.” By entering a debit to your cash account, you’re recording the cash receipt, which is the official accounting entry that records the payment.

But before we go further, let’s review two accounting definitions: a debit and a cash account.

Back to recording. Just like when you recorded the initial loan, you’ll also need to record its interest. And that involves one major rule: your business has to recognize the interest expense on the same periodic basis and treat it as an expense.

Let’s pull out our dictionary again:

Let’s focus on the interest payments themselves. If you made a payment after the interest has been accumulated and recorded, don’t worry! This happens.

Interest payments won’t cause another interest expense. When you record your interest payment, simply enter it in your books as a debit to the “Interest Payable” account.

To debit the "Interest Payable" account, enter the amount of interest payment as a debit in your books. This reduces the amount of money you owe for interest.

To credit the "Cash" account, enter the same amount as a credit in your cash account. This shows that you have paid that amount of interest.

By doing these two things, you’re removing the interest that’s growing, and instead, recording your payment for the interest amount.

The final step: recording the actual loan payment. 👏

This will differ depending on the type of loan you have: unamortized, amortized, and periodic. Before you proceed, know which type is yours. This is critical for tracking, and of course, repaying on time. We’ll review definitions and how they work below.

An unamortized loan is a type of loan where the borrower doesn’t make regular payments to cover the principal amount and the accrued interest. Instead, they may only have to make interest payments during the loan term, which doesn’t impact the remaining principal amount (the initial amount of money borrowed.

Once your loan reaches its end date and is supposed to be repaid, your principal amount is due, an unamortized loan repayment will need to be recorded.

First, you must debit the loan account. This is an entry that shows a decrease in liability, like reducing the amount you owe to the lender. This reduces the liability on your financial records. At the same time, you’ll credit the cash account to reflect the actual cash payment you’ve made toward the loan.

A loan with periodic payments requires you make regular, recurring payments at specific times during the borrowing period, like monthly, quarterly, or annually.

If you’re recording periodic loan payments, you’ll start by applying the payment toward the interest expense. You’ll then debit the remaining amount to the loan account. This will result in a reduction of the balance you have outstanding, and then the cash account will be credited to record the cash payment.

In accounting, journal entries are how you record your financial transactions, including loan payments. They’re called journal entries because—back in the day—accountants and bookkeepers recorded transactions in a paper journal.

No matter how you track your finances, every journal entry must consist of three things: the date of the journal entry, the debit side of the journal entry, and the credit side of the journal entry.

Not every part of your loan payment is considered to be a business expense. For instance, while the interest payment portion is considered an expense, the principal payment portion of the loan payment is actually considered to be a loan payable or a notes payable—not an expense.

When using the accrual method of accounting—which enables your business to record revenue before you’ve received payment and also record expenses as they are incurred—your interest expenses and liabilities are instead recorded at the end of each accounting period. To do this, adjust entries to match the interest expense to the appropriate period.

Only the interest portion of a loan payment will appear on your business’s income statements. This will be noted as "interest expense."

In addition, the reduction of liability will be reported on your balance sheet (the financial statement that provides a snapshot of your business’s financial health at a particular date in time, including debts owed) and the principal payment will reported as a cash outflow on the your cash flow statement: a financial report of every transaction where your business earned or spent cash or cash equivalents within a certain period of time.

Repaying a loan (and recording it accurately!) is a step-by-step process. It involves recording your initial loan, the loan interest, and the payments you make on both. It also depends on the type of loan you’ve taken out: amortized, unamortized, or periodic.

Wave, one-stop money management for small business owners, makes typically-intimidating-stuff like loan repayment journal entries feel as easy as those diary entries from your childhood: save for the dramatic tears, lyrical references, and secret code words. IYKYK.