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Loan Journal Entry

How to do journal entries for loan transactions.

A loan journal entry can be recorded in different ways in bookkeeping software, here are three of them:

• A direct entry:  where your software or bookkeeping system allows you to add a loan journal entry.
• Through a bank transaction reconciliation:  where you allocate the bank transaction fed into your software to the loan account and the double-entry journal is processed in the “background” of the software. 
• Using the invoicing/billing features of bookkeeping software:  to record the acquiring of the loan itself, or the purchase of the asset and once again the journal entry is processed in the “background”.

Contents: Bank Loans Loan Interest Payable Car Loans Intercompany loans Loan forgiveness 

What does a loan journal entry do?

When you use bookkeeping software you don't usually see the automatic journal entries that happen in the "background" when reconciling your bank accounts.

Entering a manual journal is handy for adjusting your books without affecting the bank accounts, like when you need to move a transaction from one account category to another like with the loan forgiveness.

The examples on this page are for both automatic journals involving the bank account and for manual entering of journals.

Every loan journal entry adjusts the value of a few account categories on the general ledger .

The account categories are found in the chart of accounts .

Depending on the type of ledger account the bookkeeping journal will increase or decrease the total value of each account category using the debit or credit process. 

bank loan Received journal entry

Bank loans enable a business to get an injection of cash into the business. 

This is usually the easiest loan journal entry to record because it is simply receiving cash, then later adding in the monthly interest and making a regular repayment.

bank loan received journal entry

Debit : Bank Account  (asset  account )        Credit : Loan  ( liability account )

Bank loan repayment journal Entry

Debit : Loan  (liability  account )       Credit : Bank  ( asset account )

To learn more about assets and liabilities go to accounting balance sheet .

The figures from the above examples are based on the figures in the Loan Amortization image in the next section about loan interest.

loan interest payable journal entry

Adding interest to the loan account.

Debit : Loan Interest  (expense  account )       Credit : Loan  ( liability account )

The bank may be able to provide a schedule listing all expected repayment dates and amounts for the life of the loan.  

If you are unable to get a schedule from the bank you may be able to see the amount of interest in the online bank transactions or off your loan statement for the current or previous months.

You can also find a Loan Amortization template in Microsoft Excel templates and enter the loan details from the bank to calculate your own schedule as in this example:

If you use a schedule like this, compare it to your loan account each month to ensure it is tracking as expected.

car loan journal entry

A car is an asset so the journal entry for it will be similar for the purchase-via-loan of other assets like workshop equipment.

The difference between bank loans and vehicle loans is that:

• with bank loans the business receives actual money into the bank account and 
• with the vehicle loan the money is usually paid directly to the car sales company so the business doesn’t handle the money.

These car journal entries are for a vehicle costing $15,000 and for a loan of 5 years at 12% with fortnightly payments – calculated using the same Loan Amortization template mentioned above.

Purchase of Car Journal Entry

This example is based on the purchase of a car from a car sales business, which business signs you up with a loan provider. They will give you an invoice for the car and documents for the loan so you can get the information you need from those documents.

• The first journal is to record the invoice for the purchase of the car.
• The second journal is to pay off the invoice with the loan.
• The third journal adds the loan interest to the loan.
• The fourth journal records a repayment of the loan.

Debit : Vehicle  (asset  account )       Credit : Accounts Payable  ( liability account )

Using the Accounts Payable account in the above journal entry means that the invoice has not been paid with your bank funds.

The loan will offset the Accounts Payable and you will monitor the balance owing through the loan liability account, not through the accounts payable account.

car loan Journal Entry

Two accounts are debited on this loan journal entry:

Debit : Accounts Payable  (asset  account ) ,     Debit : Administration Costs  (expense  account ) - shows on the Profit and Loss report          Credit : Vehicle Loan Account  ( liability account )

Loans usually come with some kind of administration cost so this has been included in the journal. This type of cost is a deductible business expense.

Vehicle Loan Interest Payable and Repayment of Loan

Debit : Loan Interest Expense  (expense  account )       Credit : Vehicle Loan ( liability account )

Debit :  Vehicle Loan ( liability account )        Credit : Bank  (asset  account )

intercompany Loan Journal Entry

These journals occur when two or more businesses are owned by the same owner/s.

If one business is low on funds the owner might use funds from the other business bank account to pay bills due to stakeholders (vendors) or for other expenses.

Sometimes, the owner might transfer a lump sum from one business to the other for the same purpose - there may be a loan agreement drawn up or there may not be.

I am working with two types of transactions:

• The first intercompany journals are for everyday expenses paid for one business by the other business.
• The second intercompany journals are for a cash loan from one business to the other.

The two companies in this example are:

• Designer Doors

These are purely fictional names not based on any real business that I know about.

1.  Intercompany Everyday Expenses

Best Boots buys an office printer for Designer Doors for $220.00.

a. The loan journal entry in best boots is:

Debit :  Designer Doors Loan Receivable ( asset * account )        Credit : Bank  (asset  account )

*This loan entry goes to assets because cash is expected to be received into the bank.

b. The loan journal entry in Designer doors is:

This journal puts the printer into the Profit and Loss Report of Designer Doors but shows that it was paid for by Best Boots.

Debit :  Office Equipment  ( expense account )        Credit : Best Boots Loan Payable  (liability  account )

There is no bank account involved in this journal.

Repaying the Intercompany Expenses Loan

Whether this is paid in full or only partly paid, the journal is the same:

The repayment of the expense loan by Designer Doors out of their bank account to Best Boots:

Debit :  Best Boots Loan Payable  ( liability account )        Credit : Bank  (asset  account )

The repayment of the expense loan into Best Boot's bank account:

Debit :  Bank  (asset  account )        Credit :  Designer Doors Loan Receivable  ( asset account ) 

2. Intercompany Cash Loan

This is for a straight transfer of cash of $1,200 to from Best Boots to Designer Doors  without a loan agreement and without interest; the business owner decides to repay it with $300 per month for 4 months.

A. The Cash Loan Journal Entry In  Best Boots  Is:

Debit :  Designer Doors Loan Receivable  ( asset account )       Credit :  Bank  (asset  account )   

A. The Cash Loan Journal Entry In  Designer Doors  Is:

Debit :  Bank  (asset  account )        Credit :  Best Boots Loan Payable ( asset account ) 

Loan forgiveness journal entry

This was a question that was emailed to me on how to account for a PPP Loan Forgiveness.

I am using this article by Stambaughness.Com for the basis of a PPP loan forgiveness, but these examples will work with most any type of loan forgiveness.

There are two different scenarios - you must chose one:

• putting the full amount to Other Income (which increases your profit by increasing Income)    
• offsetting the loan to Expenses (which increases your profit by reducing expenses gradually over time).

My example is for a loan of $3,000 which was originally allocated to the Loan liability account.

Scenario 1: allocating the amount to Other Income

The aim here is to move the loan away for the full $3,000 from the balance sheet liability to Other Income on the Profit and Loss.

Result: This will show an extra profit of $3,000 in the month you have chosen to record the loan forgiveness.

Scenario 2: offsetting the amount to Expenses

The aim here is to move the loan away gradually from the Balance Sheet liability to the Profit and Loss Report by offsetting the cost of relevant expenses as they occur. 

This does two things:

• Decreases the loan owing on the balance sheet
• Decreases the expense on the profit and loss report – which increases the overall profit

Every time you pay for an expense in whatever month that the loan is allowed to offset, do the above steps until the loan is back down to 0.00.

In the example journal, $1,000 has been offset to wages. For this fictitious business it may be that another $1,000 is offset in the next month, and then again in a third month, finally showing a nil loan balance on the balance sheet.

Result: this provides a more balanced approach to increasing monthly profit results rather than a wham of $3,000 in one month like Scenario 1.

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What are the journal entries for an inter-company loan?

My boss has two companies: Company A and Company B. Company B takes a loan from company A in the amount of 100,000. After some time, company B returns 150,000.

What will be the accounting entry and what is the procedure of this extra amount 50,000?

As I understand it, Company A loaned Company B, a possibly related company, $100,000. Company B returned to Company A, $150,000. Inter-company loans require the charging of Interest (and recording of Interest receivable) by each party.  See this IRS link about the rates, and talk with your tax/accounting advisor for application. So, let’s say for arguments sake interest is $1,000.  The transactions will be:

Company B: Intercompany   149,000 Interest Expense  1,000            Cash               150,000 Balance sheet would show Company B has a receivable from Company A for $49,000.

Company A records this as: Cash    150,000            InterCompany         149,000          Interest Income             1,000 Balance sheet would show Company A has a payable for Company B for $49,000.  

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What Is Double Entry?

Understanding double entry, types of business accounts, the double-entry accounting system, the bottom line.

• Corporate Finance

Double Entry: What It Means in Accounting and How It's Used

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

Amanda Bellucco-Chatham is an editor, writer, and fact-checker with years of experience researching personal finance topics. Specialties include general financial planning, career development, lending, retirement, tax preparation, and credit.

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Double entry is a bookkeeping and accounting method, which states that every financial transaction has equal and opposite effects in at least two different accounts. It is used to satisfy the accounting equation :

Assets = Liabilities + Equity \begin{aligned} &\text{Assets} = \text{Liabilities} + \text{Equity} \\ \end{aligned} ​ Assets = Liabilities + Equity ​

With a double-entry system, credits are offset by debits in a general ledger or T-account .

Key Takeaways

• Double entry refers to an accounting concept whereby assets = liabilities + owners' equity.
• In the double-entry system, transactions are recorded in terms of debits and credits.
• Double-entry bookkeeping was developed in the mercantile period of Europe to help rationalize commercial transactions and make trade more efficient.
• The emergence of double entry has been linked to the birth of capitalism.

Investopedia / Jessica Olah

In accounting, a credit is an entry that increases a liability account or decreases an asset account. A debit is the opposite. It is an entry that increases an asset account or decreases a liability account. In the double-entry accounting system, transactions are recorded in terms of debits and credits. Since a debit in one account offsets a credit in another, the sum of all debits must equal the sum of all credits.

The double-entry system of bookkeeping standardizes the accounting process and improves the accuracy of prepared financial statements, allowing for improved detection of errors. All types of business accounts are recorded as either a debit or a credit.

Bookkeeping and accounting are ways of measuring, recording, and communicating a firm's financial information. A business transaction is an economic event that is recorded for accounting/bookkeeping purposes. In general terms, it is a business interaction between economic entities, such as customers and businesses or vendors and businesses.

Under the systematic process of accounting, these interactions are generally classified into accounts. There are seven different types of accounts that all business transactions can be classified:

• Liabilities

Bookkeeping and accounting track changes in each account as a company continues operations.

Debits and Credits

Debits and credits are essential to the double-entry system. In accounting, a debit refers to an entry on the left side of an account ledger, and credit refers to an entry on the right side of an account ledger. To be in balance, the total of debits and credits for a transaction must be equal. Debits do not always equate to increases and credits do not always equate to decreases.

A debit may increase one account while decreasing another. For example, a debit increases asset accounts but decreases liability and equity accounts, which supports the general accounting equation of Assets = Liabilities + Equity. On the income statement, debits increase the balances in expense and loss accounts, while credits decrease their balances. Debits decrease revenue account balances, while credits increase their balances.

Double-entry bookkeeping was developed in the mercantile period of Europe to help rationalize commercial transactions and make trade more efficient. It also helped merchants and bankers understand their costs and profits. Some thinkers have argued that double-entry accounting was a key calculative technology responsible for the birth of capitalism .

The accounting equation forms the foundation of double-entry accounting and is a concise representation of a concept that expands into the complex, expanded, and multi-item display of the  balance sheet . The balance sheet is based on the double-entry accounting system where the total assets of a company are equal to the total liabilities and shareholder equity.

Essentially, the representation equates all uses of capital (assets) to all sources of capital (where debt capital leads to liabilities and equity capital leads to shareholders' equity). For a company to keep accurate accounts, every single business transaction will be represented in at least two of the accounts.

For instance, if a business takes a loan from a financial entity like a bank, the borrowed money will raise the company's assets and the loan liability will also rise by an equivalent amount. If a business buys raw materials by paying cash, it will lead to an increase in the inventory (asset) while reducing cash capital (another asset). Because there are two or more accounts affected by every transaction carried out by a company, the accounting system is referred to as double-entry accounting.

This practice ensures that the accounting equation always remains balanced; that is, the left side value of the equation will always match the right side value.

Example of Double Entry

A bakery purchases a fleet of refrigerated delivery trucks on credit; the total credit purchase was $250,000. The new set of trucks will be used in business operations and will not be sold for at least 10 years—their estimated useful life .

To account for the credit purchase, entries must be made in their respective accounting ledgers. Because the business has accumulated more assets, a debit to the asset account for the cost of the purchase ($250,000) will be made. To account for the credit purchase, a credit entry of $250,000 will be made to notes payable. The debit entry increases the asset balance and the credit entry increases the notes payable liability balance by the same amount. 

Double entries can also occur within the same class. If the bakery's purchase was made with cash, a credit would be made to cash and a debit to asset, still resulting in a balance.

What Is the Difference Between Single-Entry Accounting and Double-Entry Accounting?

In single-entry accounting, when a business completes a transaction, it records that transaction in only one account. For example, if a business sells a good, the expenses of the good are recorded when it is purchased the good, and the revenue is recorded when the good is sold. With double-entry accounting, when the good is purchased, it records an increase in inventory and a decrease in assets. When the good is sold, it records a decrease in inventory and an increase in cash (assets). Double-entry accounting provides a holistic view of a company's transactions and a clearer financial picture.

What Is the Disadvantage of the Double-Entry Accounting System?

The primary disadvantage of the double-entry accounting system is that it is more complex. It requires two entries to be recorded when one transaction takes place. It also requires that mathematically, debits and credits always equal each other. This complexity can be time-consuming as well as more costly; however, in the long run, it is more beneficial to a company than single-entry accounting.

What Is an Example of Double Entry?

An example of double-entry accounting would be if a business took out a $10,000 loan and the loan was recorded in both the debit account and the credit account. The cash (asset) account would be debited by $10,000 and the debt (liability) account is credited by $10,000. Under the double-entry system, both the debit and credit accounts will equal each other.

The double-entry accounting method has many advantages over the single-entry accounting method. First and foremost is that it provides an organization with a complete understanding of its financial profile by noting how a transaction affects both credit and debit accounts. It also makes spotting errors easier, because if debits and credits do not match, then something is wrong. Lastly, it makes preparing financial statements easier.

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In double entry accounting, how do I enter a loan?

I have taken an accounting course several years ago, but I'm a little rusty. I'm using GnuCash, double entry accounting software.

I have a loan from a friend, so no interest. I have paid about half the loan off and have spent all the money from the loan years ago. However, now I have decided to start using GnuCash to track my finances.

How do I enter this loan? I'm confused as to which accounts to enter this in, since I have no assets from the loan, they have all been spent. As of now I only have the liability. So where does the other entry go?

• double-entry

2 Answers 2

Typically in GnuCash, account balances that exist at the beginning of the time you're keeping records for are balanced by entries in an Equity account “ Equity:Opening Balances ”, which is part of the default set of accounts created for you. This account is really just a placeholder so that everything balances, and that's perfectly normal.

So, just enter “Equity:Opening Balances” as the “other entry” when entering the first, opening balance, transaction in your Liability account for the loan. If you have not already created the liability account, then just use the “Opening Balance” tab of the New Account window to enter the initial balance as you create the account.

(Disclaimer: I have no formal knowledge of accounting; I just use GnuCash and read the users' mailing list.)

• +1 This is the right way to start from a current state snap-shot. If you want to keep track of what you used the loan for - you can use my suggestion. –  littleadv Commented Jun 4, 2013 at 4:42

Generally loan goes against an asset, in your case though it appear that you don't have any fixed assets related to this loan. So it seems like you got a cash loan (current asset/checking account?) which you spent (expenses). Since you're doing it retroactively, you'll probably just put totals in the expenses without detailing them.

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Adjusting Entries (Explanation Part 3)

For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

Read more →

Author: Harold Averkamp, CPA, MBA

Introduction to Adjusting Entries

Adjusting Entries - Asset Accounts

Adjusting Entries - Liability Accounts

Accruals & Deferrals, Avoiding Adjusting Entries

Adjusting Entries – Liability Accounts

Notes Payable $5,000

Notes Payable is a liability account that reports the amount of principal owed as of the balance sheet date. (Any interest incurred but not yet paid as of the balance sheet date is reported in a separate liability account Interest Payable.) The accountant has verified that the amount of principal actually owed is the same as the amount appearing on the preliminary balance sheet. Therefore, no entry is needed for this account.

Interest Payable $0

(It’s common not to list accounts with $0 balances on balance sheets.)

Interest Payable is a liability account that reports the amount of interest the company owes as of the balance sheet date. Accountants realize that if a company has a balance in Notes Payable, the company should be reporting some amount in Interest Expense and in Interest Payable. The reason is that each day that the company owes money it is incurring interest expense and an obligation to pay the interest. Unless the interest is paid up to date, the company will always owe some interest to the lender.

Let’s assume that the company borrowed the $5,000 on December 1 and agrees to make the first interest payment on March 1. If the loan specifies an annual interest rate of 6%, the loan will cost the company interest of $300 per year or $25 per month. On March 1 the company will be required to pay $75 of interest. On the December income statement the company must report one month of interest expense of $25. On the December 31 balance sheet the company must report that it owes $25 as of December 31 for interest.

The adjusting journal entry for Interest Payable is:

It is unusual that the amount shown for each of these accounts is the same. In the future months the amounts will be different. Interest Expense will be closed automatically at the end of each accounting year and will start the next accounting year with a $0 balance.

Accounts Payable $2,500

Accounts Payable is a liability account that reports the amounts owed to suppliers or vendors as of the balance sheet date. Amounts are routinely entered into this account after a company has received and verified all of the following: (1) an invoice from the supplier, (2) goods or services have been received, and (3) compared the amounts to the company’s purchase order . A review of the details confirms that this account’s balance of $2,500 is accurate as far as invoices received from vendors.

However, under the accrual basis of accounting the balance sheet must report all the amounts owed by the company—not just the amounts that have been entered into the accounting system from vendor invoices. Similarly, the income statement must report all expenses that have been incurred—not merely the expenses that have been entered from a vendor’s invoice. To illustrate this, assume that a company had $1,000 of plumbing repairs done in late December, but the company has not yet received an invoice from the plumber. The company will have to make an adjusting entry to record the expense and the liability on the December financial statements. The adjusting entry will involve the following accounts:

The adjusting entry for Accounts Payable in general journal format is:

The balance in the liability account Accounts Payable at the end of the year will carry forward to the next accounting year. The balance in Repairs & Maintenance Expense at the end of the accounting year will be closed and the next accounting year will begin with $0.

Wages Payable $1,200

Wages Payable is a liability account that reports the amounts owed to employees as of the balance sheet date. Amounts are routinely entered into this account when the company’s payroll records are processed. A review of the details confirms that this account’s balance of $1,200 is accurate as far as the payrolls that have been processed.

However, under the accrual basis of accounting the balance sheet must report all of the payroll amounts owed by the company—not just the amounts that have been processed. Similarly, the income statement must report all of the payroll expenses that have been incurred—not merely the expenses from the routine payroll processing. For example, assume that December 30 is a Sunday and the first day of the payroll period. The wages earned by the employees on December 30-31 will be included in the payroll processing for the week of December 30 through January 5. However, the December income statement and the December 31 balance sheet need to include the wages for December 30-31, but not the wages for January 1-5. If the wages for December 30-31 amount to $300, the following adjusting entry is required as of December 31:

The adjusting journal entry for Wages Payable is:

The $1,500 balance in Wages Payable is the true amount not yet paid to employees for their work through December 31. The $13,420 of Wages Expense is the total of the wages used by the company through December 31. The Wages Payable amount will be carried forward to the next accounting year. The Wages Expense amount will be zeroed out so that the next accounting year begins with a $0 balance.

Unearned Revenues $1,300

Unearned Revenues is a liability account that reports the amounts received by a company but have not yet been earned by the company. For example, if a company required a customer with a poor credit rating to pay $1,300 before beginning any work, the company increases its asset Cash by $1,300 and it should increase its liability Unearned Revenues by $1,300.

As the company does the work, it will reduce the Unearned Revenues account balance and increase its Service Revenues account balance by the amount earned (work performed). A review of the balance in Unearned Revenues reveals that the company did indeed receive $1,300 from a customer earlier in December. However, during the month the company provided the customer with $800 of services. Therefore, at December 31 the amount of services due to the customer is $500.

Let’s visualize this situation with the following T-accounts:

The adjusting entry for Unearned Revenues in general journal format is:

Since Unearned Revenues is a balance sheet account, its balance at the end of the accounting year will carry over to the next accounting year. On the other hand Service Revenues is an income statement account and its balance will be closed when the current year is over. Revenues and expenses always start the next accounting year with $0.

Please let us know how we can improve this explanation

The amount of principal due on a formal written promise to pay. Loans from banks are included in this account.

This current liability account reports the amount of interest the company owes as of the date of the balance sheet. (Future interest is not recorded as a liability.)

This account is a non-operating or “other” expense for the cost of borrowed money or other credit. The amount of interest expense appearing on the income statement is the cost of the money that was used during the time interval shown in the heading of the income statement, not the amount of interest paid during that period of time.

This current liability account will show the amount a company owes for items or services purchased on credit and for which there was not a promissory note. This account is often referred to as trade payables (as opposed to notes payable, interest payable, etc.)

To learn more about accounts payable, see our Accounts Payable Outline .

Suppliers. Companies that provide goods or services.

Also referred to as a “p.o.” A multi-copy form prepared by the company that is ordering goods. The form will specify the items being ordered, the quantity, price, and terms. One copy is sent to the vendor (supplier) of the goods, and one copy is sent to the accounts payable department to be later compared to the receiving ticket and invoice from the vendor.

A current liability account that reports the amounts owed to employees for hours worked but not yet paid as of the date of the balance sheet.

A liability account that reports amounts received in advance of providing goods or services. When the goods or services are provided, this account balance is decreased and a revenue account is increased. To learn more, see Explanation of Adjusting Entries .

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Adjusting Entries Outline

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Pledging Accounts Receivable

Written by True Tamplin, BSc, CEPF®

Reviewed by subject matter experts.

Updated on January 30, 2024

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Table of Contents

Definition and explanation.

Pledging accounts receivable is essentially the same as using any asset as collateral for a loan. Cash is obtained from a lender by promising to repay.

If the loan is not repaid, the collateral will be converted to cash, and the cash will be used to retire the debt.

The receivables can be either an identified set of notes and accounts or a general group in which new ones can be added and old ones retired.

The collection of a pledged receivable has no impact on the loan balance.

The pledging agreement usually calls for the substitution of another receivable for the one collected.

As an example, suppose that Sample Company borrows $80,000 on 31 December 2023, and agrees to pay back $81,600 on 1 April 2024.

Further, it pledges $100,000 of trade receivables for the loan. The company would make three journal entries as follows:

The last two entries can be combined, but they are shown separately here to facilitate a comparison of pledging with the other approaches.

The only financial statement disclosures provided for pledged receivables are notes or parenthetical comments.

A similar notation is provided for the notes payable .

Assignor Collects

As an alternative to pledging, the company may decide to assign its receivables to a lending institution.

Under this arrangement, the original holder essentially transfers title to the third party but agrees to collect the receivables and pay the cash to the factor .

Suppose that Sample Company obtains $80,000 cash on 31 December 2023 by assigning $100,000 of its trade receivables.

The company agrees to place the collections in a special restricted checking account from which it will repay the original $80 000 plus a $2,400 finance charge on April 1, 2024.

These journal entries would be made as follows:

To record partial collection of the assigned accounts :

To accrue the finance charge:

To reclassify the uncollected accounts and unrestricted cash:

The disclosures that would be provided on various balance sheet dates are shown in the following example, under the simplifying assumption that no other activity took place.

Notice that the payable to the factor is contra to the assigned accounts. Any restricted cash balance is, in turn, contra to the payable account.

Most arrangements of this type call for more frequent payments than the example shows.

The net result of the assignment is that Sample Company obtained $80,000 by giving up $82,400 of receivables.

Pledging Accounts Receivable FAQs

What is pledging accounts receivable.

Pledging Accounts Receivable means that a business gives up some of its rights to an asset in order to borrow money. For example, you could pledge your car title as collateral for a loan. If the loan isn't repaid, the lender can take possession of your car.

What are the journal entries for pledging accounts receivable?

There are no Special Journal entries required when you pledge your Accounts Receivable as collateral for a loan. The lender still has to approve giving up your Accounts Receivable before making the loan.

How are accounts receivable journal entries prepared?

Accounts Receivable are money owed to a company by their customers for products they've already received. Accounts are recorded in the balance sheet as assets.

What are the journal entries for assigning Accounts Receivable as collateral for a loan?

The entry to record assignment of Accounts Receivable as collateral would be a credit to cash, and a debit to assign Accounts Receivable. The cash account is debited because the company gave up the assigned receivables. The assign Accounts Receivable account is credited because they still owe this money to their customers.

What are the main financial statements in an assignment of accounts receivable?

The three main Financial Statements in an assignment of Accounts Receivable are the income statement, balance sheet, and Cash Flow statement. The income statement and Cash Flow statements would report the repayments on the receivables.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide , a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University , where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon , Nasdaq and Forbes .

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• Receivables
• Notes Receivable
• Credit Terms
• Cash Discount on Sales
• Accounting for Bad Debts
• Bad Debts Direct Write-off Method
• Bad Debts Allowance Method
• Bad Debts as % of Sales
• Bad Debts as % of Receivables
• Recovery of Bad Debts
• Accounts Receivable Aging
• Assignment of Accounts Receivable
• Factoring of Accounts Receivable

Factoring of accounts receivable is the practice of transferring the ownership of accounts receivable to a company specialized in receivable collection, in exchange for immediate cash. In other words, the company that originally owns the receivables, sells them to another company called “factor” and receives immediate cash.

Factoring helps a business improve its cash flow by converting its receivables immediately into cash instead of waiting for the due dates of payments by customers. A drawback of factoring is that it is done at a discount, which means that the cash received on factoring of receivables is less than the value of the receivables transferred. This is because the factor expects a certain margin and it faces risks such as time value of money , and depending on the agreement, the risk of default by the debtors.

The parties to the factoring agreement assess the recoverability of the accounts receivable, decide whether or not the factoring agreement will be with recourse or without recourse, and then agree on a suitable discount factor to calculate the amount of fee to be charged by the factor i.e. the discount. After deducting such a fee from the value of the accounts receivable, the factor pays in cash to the originating company. The factor may also withhold an additional amount as a refundable security against any bad debts that may arise.

As a result of the above transaction, the factor gains ownership of the accounts receivable and has access to the detailed records of those receivables . The factor is specialized in receivable collection and it may actually be cost effective for businesses to factor their receivables because doing so will save costs such as wages paid to staff for following up with customers.

The factor collects cash from the debtors as the due dates approach. The procedure to be followed in a situation where a debt becomes irrecoverable, depends on whether or not the factoring agreement is with recourse.

Recourse vs non-recourse factoring

Under non-recourse factoring, the factor may set-off the sum retained as a security, if any, against any bad debts that may arise but the factor is not entitled to be reimbursed by the originating company if the total of bad debts exceed the amount of security. In other words, the additional loss on bad debts under non-recourse factoring is borne by the factor.

Under a factoring agreement with recourse, the company factoring its receivables agrees to pay bad debts in full to the factor. So if the security falls short of the total bad debts, the factor is entitled to be reimbursed for bad debts in full.

Non-recourse factoring is riskier than factoring with recourse for the factor, generally resulting in higher discount rates over factoring with recourse.

Factoring vs assignment of receivables

Factoring is different from a financing agreement involving assignment of receivables because the later uses receivables as a collateral security for a loan, but the actual ownership of the receivables and the right to collect them is not transferred as long as the loan and any related interest payments are paid in time.

The following example illustrates the journal entries to record transactions related to factoring with and without recourse:

On January 1, 20X5, Impatient Inc. factored its accounts receivable of $100,000 at a fee of 8%. Under the terms of the agreement, the company received $82,000 in cash and the rest of the amount was retained by the factor as a security for any bad debts that may arise. Any excess of this security sum over the total bad debts was agreed to be returned by the factor at the end of the accounting period i.e. December 31, 20X5.

On December 31, 20X5 the full amount of security sum was withheld by the factor because the actual bad debts totaled $11,000 exceeding the security sum.

Impatient Inc. had already provided allowance for doubtful debts in the factored accounts receivable and a bad debts expense was recognized in the income statement of year ended December 31, 20X4.

Required: Pass journal entries to record the above transactions for Impatient Inc. both under factoring with recourse and factoring without recourse.

January 1, 20X5: Here, the journal entry will be identical under both factoring with recourse and factoring without recourse.

December 31, 20X5: The journal entries will differ under the two types of factoring. Since the actual bad debts exceed the amount initially retained by the factor, Impatient Inc must pay the factor, an additional amount of $1,000 under factoring with recourse but there is no such remedy if the factoring is without recourse.

Under factoring with recourse:

Under factoring without recourse:

It is important to note that the type of factoring influences the amount of fee charged and the amount of security held by the factor and the scenario in this example is only for the purpose of comparing the two types. The amount of security retained may be zero under factoring with recourse because the agreement guarantees the factor that any debts that may turn out to be irrecoverable will be reimbursed.

by Irfanullah Jan, ACCA and last modified on Oct 29, 2020

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Home > Accounts Receivable > Factoring Accounts Receivable Journal Entries

Factoring Accounts Receivable Journal Entries

The factoring accounts receivable journal entries below act as a quick reference, and set out the most commonly encountered situations when dealing with the double entry posting of accounts receivable factoring.

No Recourse Factoring Accounts Receivable Journal Entries

The factoring accounts receivable journal entries are based on the following information:

• No recourse
• Accounts receivable 50,000 on 45 days terms
• Factoring fee of 5% (2,500)
• Initial advance of 80% (40,000)
• Interest on advances at 9%, assuming outstanding on average for 40 days (40,000 x 9% x 40 / 365 = 395)
• Bad debt allowance already recorded in the accounting records of the business of 2% (1,000)
• Sales returns and allowances 2,000

With Recourse Accounts Receivable Factoring

Supppose the business decides that the estimated bad debts are 2% (1,000), then a recourse liability is established.

If subsequently the accounts are not collected from the customers, under a with recourse factoring arrangement the business buys the accounts back from the factoring company. In the above example, the factoring company owed the business the retention balance of 5,105, the with recourse liability of 1,000 is deducted from this and the balance of 4,105 paid over.

About the Author

Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.

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