Loans—regardless of the origination point—represent a liability to a company. Liabilities carry a natural credit balance on the accounting books. Shareholders may choose to lend money in addition to their initial investment for stock. Accountants also record debits to loans. These represent repayments made against the loan. Payments are necessary based on the agreements made between the loan and its lenders—even shareholders. Accountants typically make these entries into the general ledger on a monthly basis.
Record the loan initiation. Debit cash and credit long-term loans. A further description may be necessary to differentiate the loan from others on the accounting books.
Compute monthly payments for the loan. Use the loan agreement to calculate the principal and interest payment. In some shareholder loans, the payment may be a fixed amount for each month of the loan.
Post the loan payment. Debit the long-term loan and credit cash. Repeat this process each month the loan is outstanding.
The requirements for shareholder loans may differ from those of standard loans. Posting payments are necessary according to the agreed upon terms, which may only require balloon payments rather than monthly payments. The payment posting process is the same, however.
- "Intermediate Accounting"; J. David Spiceland, et al.; 2007