Definition of Loan to Employee
A loan to an employee is money advanced by the company to assist the employee. If the employee is expected to repay the loan within one year of the balance sheet date, the loan balance is a current asset of the company. Any amount not expected to be collected within one year is a noncurrent or long term asset.
It is common for the loan to an employee to specify an interest rate and a schedule of payments.
Entry to Record a Loan to Employee
Assume that a company lends an employee $5,000 for a family emergency. The entry will debit Loan to Employee for $5,000 and will credit Cash for $5,000.
Under the accrual method of accounting, at each balance sheet date the company should record any accrued interest by debiting Interest Receivable and crediting Interest Income.
When the employee makes a payment, the company will debit Cash and will credit Interest Receivable and Loan to Employee for the appropriate amounts.