To record loan proceeds, credit a loan payable liability for the full amount borrowed and debit the bank for what actually arrived. If the lender kept fees at funding, debit those fees as well so the entry balances. The deposit is never income. Later payments split between reducing the liability and interest expense.
Why are loan proceeds not income?
Loan proceeds are not income because the client has to pay the money back. Income is money the business earned by selling something. Borrowed money creates a matching debt the moment it arrives, so the business is no richer than before: it has more cash and an equal obligation.
Coding a loan deposit to sales or other income is a costly mistake. Profit jumps by the full loan amount for that month, and the tax return built from those books overstates income. The balance sheet shows no debt, so later payments have nothing to reduce and get coded as expenses instead, which understates profit in every month after. Both errors last until someone finds the loan.
A loan deposit is often easy to spot. It tends to be large, round or close to round, and it carries the lender's name or the words "loan" or "advance" in the description. When a large credit has none of those clues, treat it as unidentified until the client explains it.
The loan proceeds entry against a liability account
The loan proceeds entry debits the bank for the deposit and credits a loan payable account for the amount borrowed. When the deposit and the loan amount are the same, that is the whole entry. The liability then sits on the balance sheet until the payments bring it down to zero.
For an example loan of 25,000.00 deposited in full:
| Account | Debit | Credit |
|---|---|---|
| Business checking | 25,000.00 | |
| Loan payable, Example Bank term loan | 25,000.00 |
One liability account per loan
Open a separate loan payable account for each loan, named with the lender and enough detail to tell loans apart. A client with an equipment loan and a working capital loan from the same lender needs two accounts. Each one should agree with its own lender statement at year end, and that is only possible if the two are kept separate.
Current and long-term portions
On a formal balance sheet, the part of the loan due within the next twelve months is often shown as a current liability and the rest as long-term. Many small clients do not need this split in their monthly books. If the client's accountant or lender asks for it, the amortization schedule gives the figure, and a year-end reclassification entry handles it.
Lender fees withheld from loan proceeds at funding
Lender fees withheld from loan proceeds make the deposit smaller than the amount borrowed. The client owes the full loan, but the bank receives the loan minus origination, documentation or other fees the lender took at closing. The entry needs a third line for those fees, so the liability is still recorded at the full amount.
The worked example
The following is an example. A fictional client, Example Fabrication LLC, borrows 50,000.00 on a five-year term loan at 8% annual interest. The lender withholds an origination fee of 1,000.00 and a documentation fee of 250.00, and deposits 48,750.00 into business checking ending 4417.
| Account | Debit | Credit |
|---|---|---|
| Business checking | 48,750.00 | |
| Loan fees | 1,250.00 | |
| Loan payable, Example Lender term loan | 50,000.00 |
The bank side matches the statement exactly. The liability matches the loan agreement exactly. The fees are recorded at the amount on the closing statement.
Where the fees belong
Loan fees can be recorded as an expense when paid, or held on the balance sheet and spread over the life of the loan. Which approach the client uses depends on the size of the fees and on how the client's accountant wants the statements prepared. Pick one with the accountant and use it for every loan the client takes out. If the fees are spread, the monthly amortization becomes a recurring entry to add to the close.
Keep loan fees apart from ordinary bank charges. A monthly service charge or a wire fee is an operating cost of having a bank account, while a loan fee is a cost of borrowing. The guide to recording bank fees from a client statement covers the ordinary charges.
Fees paid separately
Some lenders deposit the full loan and debit the fees a few days later as a separate line. In that case the proceeds entry is the simple two-line version, and the fee debit is coded to loan fees when it appears on the statement. The total is the same either way.
What documents back a loan proceeds entry?
A loan proceeds entry is backed by three documents: the signed loan agreement or promissory note, the closing or settlement statement showing the amount funded and the fees withheld, and the amortization schedule showing each payment's split. Ask the client for all three when the deposit first appears, while the paperwork is still easy to find.
| Document | What it gives you |
|---|---|
| Loan agreement or note | The amount borrowed, the interest rate, the term and the lender's legal name |
| Closing or settlement statement | The amount deposited, each fee withheld and any amounts paid to others at closing |
| Amortization schedule | Principal and interest for each payment, and the balance after each one |
Some lenders provide these through an online portal. If the client wants to give you direct access to the lender's portal, or to connect it to other software, agree in writing what you can see and do there. The considerations are set out in client consent for bookkeeping software.
A client who cannot find the schedule can usually ask the lender for one. Do not build your own from the rate and term unless the client cannot get one at all, because lenders differ in how they count days and round payments, and a self-built schedule drifts from the lender's statement.
The first loan payment after the proceeds land
The first loan payment after the proceeds land is a single debit on the statement that must be split between principal, which reduces the loan payable account, and interest, which is an expense. Take the split from the lender's amortization schedule for that payment number. Never code the whole payment to an expense.
Continuing the example, the schedule shows a monthly payment of 1,013.82. The first payment is 333.33 of interest and 680.49 of principal. These figures are illustrative.
| Account | Debit | Credit |
|---|---|---|
| Loan payable, Example Lender term loan | 680.49 | |
| Interest expense | 333.33 | |
| Business checking | 1,013.82 |
After this payment, the loan payable balance is 50,000.00 minus 680.49, which is 49,319.51. That figure should match the remaining balance on the lender's schedule after payment one. If it does, the funding entry and the first split are both right.
The split changes every month as interest falls and principal grows. Handling the months that follow, including corrections when the split went wrong, is covered in splitting loan payments into principal and interest.
A short first payment or an interest-only period
Some loans begin with a payment that covers only the interest from the funding date, or with several interest-only months. In those months the whole payment is interest and the loan balance does not move. The schedule shows this, which is one more reason to get it before coding the first payment.
Line of credit draws compared with term loan proceeds
A line of credit draw is recorded like loan proceeds: debit the bank, credit a line of credit liability. The difference is that a line is drawn and repaid many times, so the balance rises and falls each month. A term loan is funded once and paid down on a fixed schedule.
Draws and repayments
Each draw on a line of credit increases the liability, and each repayment reduces it. Interest is usually billed monthly on the balance outstanding, as a separate charge or included in a payment. The lender's monthly statement shows the balance, the interest and the payments, and the liability in the books should match its closing balance.
Draws that pay a vendor directly
Some lines let the client pay a vendor straight from the line, without the money passing through checking. Those draws never appear on the bank statement. They are found on the line of credit statement, and each one credits the liability and debits whatever was bought. Asking for the line of credit statement along with the checking statement keeps those draws from being missed. AutoBankConvert converts a client's checking, savings and credit card statements in one batch, so the bank side is ready when you compare it with the lender's statement; the homepage shows how a batch is set up.
Loan proceeds that never touch the client's bank account
Loan proceeds do not always reach the client's bank account. An equipment lender may pay the dealer, or a refinance may pay off an old loan at closing. The loan is still the client's, so it still has to be recorded, even with nothing on the statement.
Paid to a seller
When an equipment lender pays the dealer, record the asset and the loan with no bank line: debit equipment for the purchase price, credit loan payable for the amount borrowed. Any down payment the client made from checking is a separate line on the statement and also debits equipment.
Paid to another lender
When a new loan pays off an old one at closing, debit the old loan's payable account to close it, credit the new loan's payable account, and record any fees from the closing statement. Only the cash difference, if any, appears in checking.
Paid for a customer's job
A contractor's lender may fund materials for a specific customer job. If the client will charge those materials on to the customer, they are a billable cost, recorded both as the expense and as the amount to rebill. Recording billable expenses you charge back covers how to make the cost and the rebilled income both show up and match.
The year-end tie-out
Whatever path the money took, the check at year end is the same: each loan payable account must equal the balance on the lender's year-end statement. A gap points to a missed draw, a payment coded wholly to expense, or proceeds that went to someone else and were never booked.