Loan payable definition
/What is a Loan Payable?
A loan is an arrangement under which the owner of property allows another party the use of it (usually cash) 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.
The interest that a borrower 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.
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Presentation of 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 Difference Between a Loan Payable and Accounts Payable
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 sum of cash from a lender.
Example of a Loan Payable
The owner of English Bricklayers decides to obtain a loan from the local bank, so that he can fund the purchase of a small warehouse for his bricks. The lending arrangement is a $100,000 loan, to be repaid in fifty monthly installments, plus interest. The company records the initial loan acquisition as a debit to the cash account and a credit to the loan payable account. After one month, the company pays the lender $2,000 of the loan plus $800 interest, which leaves $98,000 remaining in the loan payable account. The associated journal entry is a $2,000 debit to the loan payable account, an $800 debit to the interest expense account, and a $2,800 credit to the cash account.
The company will continue with these payments until the loan has been completely paid off with the fiftieth loan payment. Based on how the loan is structured, the loan payable declines by a steady rate through the borrowing period.
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