What is the entry when a company lends money to an employee?

Definition of Employee Loan

When a company lends money to one of its employees, the company is reducing its Cash and increasing another asset such as Other Receivables-Advances to Employees (if a note is not involved) or Notes Receivable from Employees.

Example of Employee Loan

Assume an employee's car needs an $800 repair and the employee does not have the money. The company employer agrees to give the employee an $800 advance to pay for the repair. The accounting entry made by the company in its general ledger accounts is as follows:

  • Debit to Other Receivables-Advances to Employees for $800
  • Credit to Cash for $800

When the company earns interest on an employee loan or advance, the company should credit the amount earned to Interest Income and debit Cash or Other Receivables.