How Do I Deal With A Bank Loan And Repayments?

A business loan can be managed in your product as a bank account.

However, you should appreciate that Bank Accounts are either a current asset or a current liability (if in overdraft). A business loan is a long term liability and depending how your chart of accounts is structured this may affect the nominal account used and certainly the account should appear in the long term liabilities in the Balance Sheet

Generally, the bank only issue statements for loans quarterly or less and may only apply interest quarterly. In this case you may wish to accrue interest monthly and adjust when you receive the statement.

Set Up The Loan Account

See Set up a Bank Account for how to assign or create an account code specific to your business loan.

• Then record the loan as a bank transfer from this loan account to the bank account receiving the money.

Record Loan Repayments

• Loan repayments will typically consist of a capital repayment element and an interest element.

• You should consult your bank, your bookkeeper or accountant to determine the capital and interest elements as these can be different for each loan repayment made even if the amount being paid is the same.

Enter the loan repayment as two Cash Book transactions:
– The full repayment as a bank transfer from the bank account paying the money to the loan account.
– The interest element as a Nominal Payment from the loan account analysed as interest payable – e.g. EF02 – BANK INTEREST or separately as Loan Interest rather than overdraft interest.

Reconciliation

The set-up and repayment transactions should then be reconciled with your annual or quarterly loan statement from your bank.

There might be a small difference between the bank’s annual interest charge on the statement and the sum of the interest element transactions you have entered. Confirm that this difference is correct (or at least acceptable) and record a Nominal Payment (if the bank’s interest is more) or Nominal Receipt (if the bank’s interest is less) as above accordingly to balance.

Alternatively you may not wish to operate the loan as a bank account but as a simple nominal account – however the principles are the same except that payments will be made that need to be split rather than bank transfers.