Loan payable

A loan is an arrangement under which the owner of property (usually cash) allows another party the use of the property in exchange for an interest payment and the return of the property at the end of the lending arrangement. The loan is documented in a promissory note. If any portion of the loan is still payable as of the date of a company's balance sheet, the remaining balance on the loan is called a loan payable.

If the principal on a loan is payable within the next year, it is classified on the balance sheet as a current liability. Any other portion of the principal that is payable in more than one year is classified as a long term liability. If the covenant on a loan has been breached, but the lender has waived the covenant requirement, it could still mean that the entire amount of the loan is technically payable at once, in which case it should be classified as a current liability.

The interest that a company will owe on a loan in the future is not recorded in the accounting records; it is only recorded with the passage of time, as the interest owed becomes an actual liability.

The lender may have to create a reserve for doubtful accounts to offset its portfolio of loans payable, in situations where it appears that some loans will not be repaid by a borrower.

A loan payable differs from accounts payable in that accounts payable do not charge interest (unless payment is late), and are typically based on goods or services acquired. A loan payable charges interest, and is usually based on the earlier receipt of a certain sum of cash from a lender.

As an example of a loan payable, a business obtains a loan of $100,000 from a third party lender and records it with a debit to the cash account and a credit to the loan payable account. After one month, the business pays back $10,000 of the loan payable, plus interest, leaving $90,000 in the loan payable account.

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