Accounting terms can sometimes be confusing especially for those who aren’t familiar with finance. Businesses borrow money from banks for various reasons, and this needs to be recorded into the balance sheets. We will be talking about where borrowed money is imputed in the balance sheet and other financial terms.
Where does borrowed money go in the balance sheet?
Borrowed money needs to be accounted for properly in the balance sheet to avoid problems in the future. Borrowed funds are classified into short-term and loan-term loans, and they are imputed on the right side of a balance sheet. This borrowed money is classified as liabilities by auditors and accountants, and is grouped into three:
These are loans that need to be paid in short terms (usually 12 months). This loan needs to be monitored closely so that the business has enough liquidity to offset the debts. Things included in current liabilities are interest payable, income tax, bank overdrafts, and short-term loans.
These are debts that should be paid off over a year. They are an important part of firm finance as they are usually used to fund huge assets and capital projects. If the business doesn’t use their long-term loans well, they may go under. They include bonds, mortgages, long-term loans, and leases.
These are Liabilities based on future occurrences. They are usually called potential liability. In accounting, you can only record this on a balance sheet if there is a 50% chance it will come to pass.
How to input borrowed money in a business balance sheet?
Here are some steps to record borrowed money in the books:
Put the loan proceeds and liability
When one just finishes borrowing from the bank, the business incurs either a current liability or long-term liability. To input this payment, you input a debit in the cash account to record funds receipt and credit that links to the unpaid debt.
Input the loan interest
Banks take interest on their loans regularly which could be monthly or yearly. When inputting this in the balance sheet, it must accrue the interest on the same basis. This interest is deleted from the interest expense account and credit the interest payable liability.
Input the interest payments
Interest payment should have the loans be entered as a debit to the firm account to remove the interest payable liability. Input the loan payment. To input this, the borrower should debit the debt account which would delete the loan from the accounting books and credit the cash account.
Input the borrowed amount
To enter this borrowed amount, the borrower should debit the debt account and then delete the loan from the accounting books and credit the cash account.
Should loan repayment be included in the balance sheet?
Yes, however, only the interest part of a loan should appear on the books. It should only appear as an Expense. The primary payment of loans isn’t added in the business balance statement. However, debts payable are included on your books as well as the cash outflow on the sheet.
Inputting loans on the balance sheet is pertinent, to monitor the financial progress of your business and avoid insolvent debt.