Recording a Business Loan: The Entries From Funding Day to Final Payment

A contractor buys a truck with a $35,000 note. The money lands, the truck arrives, and a month later the bookkeeper is staring at a bank feed with one $836.44 withdrawal in it and no obvious place to put it. What happens next decides whether the balance sheet tells the truth for the next four years.

Loans trip people up because a single agreement touches three different things — a liability, an expense and, often, a fixed asset — and none of them behave the same way. This piece walks through how to record a business loan end to end, using that truck note as the running example, from the entry on funding day to the last payment forty-eight months later.

The Rule That Makes Every Loan Entry Obvious

Hold on to one idea and the rest follows: borrowing reshuffles your balance sheet; it does not create profit.

The day the $35,000 arrives, cash rises by $35,000 and debt rises by $35,000. Net worth is untouched. Nothing was sold, nothing was earned, so no income account is involved — which is also why loan proceeds are not taxed. (If the two-sided nature of that entry feels unfamiliar, double-entry bookkeeping explained is a ten-minute refresher.)

Run it backwards and repayment makes sense too. Handing principal back is undoing part of that original swap — it costs you cash but it is not a cost of trading. Interest is the fee for having the lender's money in the meantime, and that is the piece your profit and loss statement should feel.

Set Up the Accounts First

Half the loan messes we see are really account-structure problems. Add these to the chart of accounts before the first repayment clears:

Funding Day: The First Entry

The specifics: $35,000 over 48 months at 6.9%, monthly repayment $836.44, funds received on 1 September.

Does borrowed money count as revenue?

Never — and it is worth stating plainly, because this error has a price tag. Loan proceeds are not revenue and not taxable, since the money is going back out. Post the $35,000 to sales and you have invented a record month, handed yourself a tax bill on somebody else's money, and made a genuine obligation vanish from the balance sheet. It is the first thing a lender's analyst notices.

The lender paid the dealer directly — now what?

Then no cash passes through your account at all, and the entry simply skips the bank: debit Vehicles (a fixed asset) $35,000, credit Notes Payable $35,000. The truck then begins its own life on a depreciation schedule that has nothing to do with the repayment schedule. Two timelines, one purchase — expect the asset's book value and the loan balance to diverge almost immediately, because they are measuring different things.

Fees were deducted from the advance. Which figure do I book?

The liability is always the face value of the note. If $34,300 lands after a $700 arrangement fee, debit the bank $34,300, deal with the fee separately (below), and credit Notes Payable the full $35,000 — because $35,000 is what you have to repay.

Every Repayment Is Two Transactions in a Trench Coat

One withdrawal, two jobs. Work out the interest first: the balance outstanding times the monthly rate (6.9% a year is 0.575% a month). Whatever remains of the $836.44 is principal.

So the first month posts as:

Across the first year that pattern produces $7,868 of principal repaid and $2,169 of interest expense — from $10,037 of payments. Treat the whole $10,037 as an expense and you have understated your profit by nearly eight thousand dollars while leaving a debt on the books that never budged.

Can I just set up a repeating entry and forget it?

Not with month one's numbers, no. The interest portion falls a little every month, so a fixed recurring split is wrong from month two and gets steadily worse. Use the repeating transaction for the payment and the accounts, but take the split from the amortisation schedule — or let software that holds the schedule work it out.

Debt is meant to shrink. A liability account that has sat at the same figure for eight months is telling you something is being posted in the wrong place — usually every payment straight to interest.

What to Do With Arrangement and Closing Fees

Fees paid to get the loan are neither interest nor a normal running cost. Formally, debt issuance costs reduce the carrying amount of the loan and are recognised across its life — the same instinct behind spreading a large purchase instead of expensing it, which we unpack in capitalize vs. expense.

Two workable approaches in a small business:

• Small fee, short life: expense it in the month it is paid. Nobody will argue about $300 on a four-year note.
• Material fee: hold it as a deferred cost and release it evenly. Our $700 fee over 48 months is about $14.58 a month of amortisation expense sitting alongside the interest.

The Year-End Entry Most Owners Miss

A balance sheet is supposed to tell a reader what falls due soon versus later. That means each year end, next year's principal has to be moved out of long-term liabilities.

Twelve payments into the truck note, $27,131.82 is left. Of that, $8,428.42 will be repaid during the coming year:

The total owed hasn't changed — $27,131.82 either way. It is now described properly: $8,428.42 current, $18,703.40 long-term.

Is the current-portion split worth the trouble?

If anyone reads your ratios, yes. Current liabilities feed both working capital and the current ratio, so books that never reclassify overstate liquidity. It is also the most useful debt number you own — it is exactly what next year's repayments will take out of the bank, which is a line in any decent cash flow forecast. Our rundown of financial ratios worth checking shows where the number lands.

Three Loans That Don't Follow the Standard Pattern

A revolving credit line

There is no amortisation schedule to work from. Each drawdown credits the credit-line liability, each repayment debits it, and the interest the lender charges each period goes to Interest Expense on its own. Because the balance swings around, reconcile a credit line monthly rather than annually.

Money lent by the owner

Park it in a dedicated Due to Owner account, well away from equity, if repayment is genuinely intended — and put a written note and a sensible interest rate behind it. Undocumented owner money tends to get recharacterised as a capital contribution, which changes the tax outcome for the owner and the company alike. The reverse trip — taking money out — is covered in owner's draw vs salary.

Interest that crosses month-end

Interest accrues daily; you pay it on a fixed date. On the accrual basis, debit Interest Expense and credit Accrued Interest Payable at month-end for the days already run, then reverse it when the payment posts. Cash-basis books ignore this entirely — cash basis or accrual basis explains which set of rules you are playing by.

A Five-Minute Audit of Your Own Loan Accounts

1. Open the month the loan funded. If any part of it hit an income account, that is the first thing to correct.
2. Look at your Interest Expense for the year. Roughly the whole repayment total? Every payment is being expensed. Zero? None of it is.
3. Compare the liability to the lender's statement. They should agree to the cent at year end. A gap is the accumulated split error.
4. Check whether the split ever changed. Identical principal and interest twelve months running means a recurring entry is quietly drifting.
5. Look for a current-portion line. No such account usually means the reclassification has never been done at all — a natural addition to your month-end routine.

How Kantivo Handles Loans

Loan bookkeeping is deterministic arithmetic with a silent failure mode, which makes it exactly the kind of work software should absorb.

• Liability accounts ready to go — Notes Payable and Current Portion of Long-Term Debt come with the default chart of accounts.
• Split transactions post principal and interest from a single bank line, so the payment matches the feed and the account still reconciles.
• Memorised transactions carry the recurring payment forward, with the split updated from your schedule instead of retyped.
• Genuine double-entry underneath means the liability, interest and bank balance can never silently disagree — an unbalanced entry simply won't post.
• Balance sheets that present debt properly, current and long-term shown separately, so the year-end reclass appears where a banker looks for it.

Frequently Asked Questions

What is the journal entry when a business loan is funded?

Two lines. Debit the bank for the cash received; credit a Notes Payable liability for the amount borrowed. No income account is involved, because you have exchanged a repayment obligation for cash rather than earned anything. Repayments afterwards split between principal and interest.

Does borrowed money count as revenue?

No, and it isn't taxable either, because the funds go back to the lender. Posting a loan to revenue manufactures profit that doesn't exist, raises your tax bill on money you owe, and removes a real obligation from the balance sheet. Interest is the only piece that ever reaches the income statement.

How much of a loan payment is interest?

It changes monthly. Interest is the outstanding balance times the monthly rate, so it's largest at the start and shrinks as the debt falls. On a $35,000 note at 6.9% over four years, the first $836.44 payment is $201.25 interest and $635.19 principal; the last is almost entirely principal.

My loan account never goes down. What went wrong?

Repayments are landing entirely in interest expense, so the liability stays at its original figure while profit is quietly eaten. The opposite error, all-to-principal, clears the loan years before the lender agrees. Compare the account to the lender's schedule and post the difference.

Why do accountants split debt into current and long-term?

Because a reader needs to know what's due soon. Principal repayable within twelve months is a current liability; the rest is long-term. Working capital and the current ratio are built from current liabilities, so books that never split look more liquid than they are.

How should money lent by the owner be recorded?

In a dedicated Due to Owner liability account rather than folded into equity, provided repayment is genuinely intended — backed by a written note and a reasonable rate. Without that, tax authorities tend to treat it as a capital contribution, which changes the position for owner and company both.

Where This Leaves You

All of it reduces to a single line: the money you borrowed is a debt rather than a good month, and only the interest you pay to use it is a cost. Book the funding correctly, take the split from the schedule every month, and move the current portion once a year.

Post the first repayment by hand so the shape of the entry sticks. Then hand the job to your amortisation schedule and your software — a four-year note is forty-eight opportunities to make the same small mistake.

Related Articles

• Capitalize vs. Expense: Deciding If a Purchase Is an Asset
• How to Calculate Depreciation for Small Business (Every Method, Worked Out)
• How to Read a Balance Sheet (Without an Accounting Degree)
• The Cash Flow Forecast Every Owner Should Run (13 Weeks, 20 Minutes a Week)
• Financial Ratios for Small Business: 8 Numbers to Check Before Your Banker Does
• Building a Chart of Accounts for Your Small Business
• Double-Entry Bookkeeping Explained, Without the Jargon
• How to Close Your Books Every Month: A Small Business Month-End Routine
• How to Reconcile a Bank Statement (Without Losing an Evening)
• How to Record Payroll: The Payroll Journal Entries Every Small Business Needs
• Owner's Draw vs Salary: Paying Yourself Without Wrecking Your Books
• What Is a General Ledger? (And Why Every Report Starts There)