BANK LOANS: Accounting for Proceeds, Interest, Amortization, and Disclosures
- Graziano Stefanelli
- Jun 6
- 3 min read
Bank loans provide external financing to companies and are recorded as liabilities on the balance sheet. Accounting for bank loans involves recognizing the loan principal, recording periodic interest, and tracking repayments over the loan term.
1. What Is a Bank Loan?
A bank loan is a formal agreement where a lender provides funds to a business, which agrees to repay the principal along with interest over a specified period.
Loan types may include:
Term loans (fixed repayment period)
Lines of credit (revolving balances)
Equipment or vehicle loans
Mortgages on business property
2. Recording Initial Loan Proceeds
When funds are received, the principal amount is recorded as a liability, and the company recognizes an increase in cash.
Entry on loan disbursement date:
debit Cash
credit Bank Loan Payable (or Notes Payable)
Example
Company borrows €100,000 from a bank:
debit Cash ............................................................ 100,000
credit Bank Loan Payable .................................... 100,000
3. Interest Expense Recognition
Interest is usually paid monthly, quarterly, or annually. Under accrual accounting, interest expense is recognized in the period it accrues, not just when paid.
Monthly interest entry:
debit Interest Expense
credit Cash or Interest Payable
Example
Monthly interest of €1,200 paid in cash:
debit Interest Expense .................................... 1,200
credit Cash .............................................................. 1,200
If unpaid at month-end:
credit Interest Payable instead of Cash
4. Loan Amortization (Principal Repayment)
When loan repayments include both principal and interest, only the principal portion reduces the liability.
Entry for repayment portion:
debit Bank Loan Payable (for principal)
debit Interest Expense (for interest)
credit Cash (for total payment)
Example
Monthly payment: €2,000 – Interest: €500 – Principal: €1,500
debit Bank Loan Payable .................................. 1,500
debit Interest Expense ........................................... 500
credit Cash ................................................................. 2,000
Amortization schedules (from banks or Excel models) are often used to break down each payment into interest and principal.
5. Accrued Interest and Year-End Adjustments
At period-end, interest accrued but unpaid must be recorded:
debit Interest Expense
credit Interest Payable
Example
At December 31, €800 of interest has accrued but will be paid in January:
debit Interest Expense ........................................... 800
credit Interest Payable ............................................. 800
This ensures interest is matched to the period it relates to, in line with accrual accounting principles.
6. Loan Covenants and Disclosures
Loan agreements may include covenants, such as:
Maintaining certain liquidity or leverage ratios
Restrictions on dividends or asset sales
Reporting requirements to lenders
Companies must disclose:
Terms of significant loans
Collateral pledged
Maturity schedules
Interest rates (fixed or variable)
These are included in the notes to the financial statements.
7. Balance Sheet Classification
Current portion: Repayments due within 12 months are shown under Current Liabilities (e.g., “Current Maturities of Long-Term Debt”)
Non-current portion: Balance due beyond 12 months is reported under Non-Current Liabilities
Example:
8. Early Repayment and Refinancing
If a loan is repaid early:
Record full settlement of principal
Recognize any prepayment penalties or fees as expenses
Update disclosures and cash flow reporting
If the loan is refinanced, old liabilities are removed, and new terms are recognized as a new liability.
Key take-aways
Bank loans increase cash and liabilities upon disbursement.
Interest must be accrued and reported regularly, even if unpaid.
Loan amortization involves splitting each payment between interest and principal.
Proper classification, covenants, and disclosures are critical for transparency and compliance.
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