What Is the Difference Between Loan Payable and Loan Receivable?
In accounting, "payable" refers to the money you owe, "receivable" to the money people owe you. That's the difference between accounts payable and accounts receivable, and also between loans payable and loans receivable.
Loans payable is a liability account listing the amount of any loan debt you've taken out and haven't repaid. A loans receivable asset account lists the amounts a lender has paid out to borrowers. You don't enter interest in loans payable or loans receivable, but report interest expense or income when you pay it out or someone pays it to you.
Loans payable and accounts payable are both about money your company owes someone else, but they're not the same. If, say, you receive $15,000 worth of raw materials on credit, that's $15,000 in accounts payable and $15,000 in your raw materials account. If you take out a $15,000 loan, you record $15,000 in added cash and $15,000 in your loans payable account.
Unlike accounts payable, your loans payable accrue interest you have to pay. You take on the debt in return for a loan of money, where accounts payable are debts due to goods or services.
Most businesses don't make loans, so loans receivable isn't an issue. If you're a bank, credit union or other lender, the loans receivable account is one of your primary assets.
For a loan receivable accounting example, assume your bank lends $150,000 to your company, depositing it in its checking account. You enter $150,000 in the account labeled "loan receivable" as a current asset, and in the current liability account "customer demand deposits". Demand deposits are available whenever the customer wants them.
If the loan comes with prepaid interest or bank fees that are recorded in other accounts, the amounts in customer demand deposits and loans receivable may not match up exactly.
Suppose you have $60,000 in loans payable, and you pay back $5,000 this month. That reduces your cash asset account by $5,000 and your loan payable balance by $55,000. When you factor in interest, though, things get more complicated.
Let's say that out of that $5,000, $750 goes toward paying interest rather than principal. Cash still goes down by $5,000, but you only reduce loans payable by $4,250. The other $750 is recorded in the interest expense journal account. Unlike the loan itself, you don't record interest in your ledger until you actually pay it.
You record a loan payable or loan receivable as a current asset or current liability if it's to be entirely repaid within the next year. Any portion of the loan that's due more than 12 months away is a long-term liability or asset.
For example, if your company takes out a $200,000 mortgage on an office complex, to be paid back over 10 years, that's $200,000 in loans payable. $20,000 of that amount is a current liability, due the first year of the loan. The remaining $180,000 is a long-term liability.
The same principle applies to loans receivable.
One problem lenders have to deal with is the possibility their customers won't pay back a loan. A loans receivable account, like an accounts receivable entry, should be accompanied by a bad debt reserve, a contra account projecting how much of loans receivable goes unpaid.
Contra accounts get the name because even though they're asset accounts, they're negative. For example, suppose your bank has $1.5 million in loans receivable, but you have reason to believe customers will default on $300,000.
Instead of listing that money as a liability, you enter it in the contra account. That shows anyone reading your accounts that out of that $1.5 million loans receivable asset account, you only anticipate making $1.2 million — useful information for anyone evaluating the bank.