[Q.46] How is a short term bank loan recorded?

Let’s assume that a company obtains a 9-month bank loan and the bank deposits the loan proceeds into the company’s checking account at the same bank.

The double entry to be recorded by the company is: 1) a debit to the company’s current asset accountCash (or Checking Account) for the amount that the bank deposited into the company’s checking account, and 2) a credit to the company’s current liability account Notes Payable (or Loans Payable) for the amount of principal that it must repay to the bank. (If there is a difference between the two amounts, it may pertain to bank fees or prepaid interest that will also have to be recorded.)

The double entry to be recorded by the bank is: 1) a debit to the bank’s current asset account Loans (orLoans Receivable) for the principal amount it will collect, and 2) a credit to the bank’s current liability account Noninterest Bearing Demand Deposits. (If there is a difference between the two amounts, it may pertain to bank fees or prepaid interest that will also have to be recorded.)

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