Loans receivable definition
/What are Loans Receivable?
Loans receivable is an account in the general ledger of a lender, containing the current balance of all loans owed to it by borrowers. This is the primary asset account of a lender. A subsidiary ledger may be used to store the detail on each of the loans outstanding, where the ending balance in the subsidiary ledger matches the ending balance for the loans receivable account in the general ledger.
Example of Loans Receivable
Shark Lending Company provides a $100,000 business loan to Rabbit Manufacturing at an annual interest rate of 6%, repayable over five years in monthly installments. When the loan is issued, Shark records the $100,000 as a debit to the Loans Receivable account, recognizing it as an asset. As Rabbit makes monthly payments, Shark applies a portion of each payment to reduce the loan principal and the rest as interest income. For instance, after the first month, where the payment is $1,933, Shark records a $433 credit to interest income and a $1,500 credit to Loans Receivable, reducing the loan balance to $98,500.
If Rabbit defaults or delays payments, Shark may need to assess the collectability of the loan and potentially recognize a bad debt expense. Thus, loans receivable not only represent revenue-generating assets but also carry credit risk that must be monitored.
Presentation of Loans Receivable
The presentation of loans receivable in an organization’s balance sheet will depend on whether loans are to be repaid within one year. When that is the case, then the receivable is classified as a current asset. Otherwise, it is classified as a non-current asset, and so will appear lower down in the balance sheet presentation.