Definition of Short Term Bank Loan
When a company borrows money from its bank and agrees to repay the loan amount within a year, the company will record the loan by increasing its cash and increasing a current liability such as Notes Payable or Loans Payable. The bank will record the loan by increasing a current asset such as Loans to Customers or Loans Receivable and increasing a current liability such as Customer Demand Deposits.
Example of a Company Recording a Loan from a Bank
Let’s assume that a company obtains a $30,000 bank loan that must be repaid within 9 months. The bank deposits the loan proceeds of $30,000 into the company’s checking account at the same bank.
The double entry to be recorded by the company is: 1) a debit of $30,000 to the company’s current asset account Cash for the amount that the bank deposited into the company’s checking account, and 2) a credit of $30,000 to the company’s current liability account Notes Payable (or Loans Payable) for the amount of principal that it must repay to the bank. (If there is a difference between the two amounts, it may pertain to bank fees or prepaid interest that will also have to be recorded.)
Example of a Bank Recording a Loan to a Customer
The double entry to be recorded by the bank is: 1) a debit to the bank’s current asset account Loans to Customers or Loans Receivable for the principal amount it expects to collect, and 2) a credit to the bank’s current liability account Customer Demand Deposits. (If there is a difference between the two amounts, it may pertain to bank fees or prepaid interest that will also have to be recorded.)
