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Journal Entry: Loan Taken, Loan Given and Investment

Arjun EP

Published on: September 28, 2020

10. How to make journal entry for loan taken, loan given and investment

(A) Loan Taken

When capital and cash are not sufficient, loan should be taken.

This loan may be for goods purchase, assets purchase or to pay operating expenses.

To take loan, security should be deposited.

Generally, there are two types of loan.

They are short-term loan and long-term loan.

Short-term loan is for maximum one year but long-term loan is for more than one year.

Short-term loan is bank overdraft; long-term loan is bank loan, debenture or bond.

Interest must be paid on loan either monthly, quarterly, half yearly or annually.

Loan Taken

Cash account	Dr	Cash received	Increase in assets
Bank account	Dr	Loan transferred into bank account	Increase in assets
To Loan account		Loan taken (without name)	Increase in liabilities
To Loan from Mr A		Loan taken (from person)	Increase in liabilities
To Loan from ABC Bank		Loan taken (from financial institution)	Increase in liabilities
(Being- loan taken ………)

Journal Entry

In the book of …………

Date	Particulars		LF	Amount Dr	Amount Cr
	Cash account	Dr		xxxxx
	Bank account	Dr		xxxxx
	To Loan account				xxxxx
	To Loan from Mr A				xxxxx
	To Loan from ABC Bank				xxxxx
	(Being- loan taken ………………………….)

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Keep in Mind (KIM)

Loan is liabilities for person or organization.

Therefore, loan is credited in journal entry. It is shown in liabilities side of balance sheet.

Nowadays, financial institutions (bank, finance company, co-operative etc) provide loan by opening bank account.

Interest on loan is payable with installment. And installment is sum of principal amount and interest.

Installment may be monthly, quarterly, half yearly and annually.

(B) Loan Given or Investment

Loan given is also known investment.

Excess money or profits are invested into other company.

Sometimes, a person gives loan on believable person without securities; but financial institution does not lend the loan without securities in SAARC countries.

Generally, these investments are made for two reasons; first is to earn income and second is to control-over another company.

Interest will be received on investment monthly or quarterly, half yearly or yearly.

Loan Given

Mr A’s account (loan given to Mr A)	Dr	Loan given to person	Increase in assets
XYZ Traders (loan given to XYZ Traders)	Dr	Loan given to firm	Increase in assets
Investment account	Dr	Invested in company	Increase in assets
To Cash account		Loan given in cash	Decrease in assets
To Bank account		Loan given by cheque	Decrease in assets
(Being- loan given to ……………………)

Journal Entry

In the book of …………

Date	Particulars		LF	Amount Dr	Amount Cr
	Loan to Mr A	Dr		xxxxx
	Loan to ABC Traders	Dr		xxxxx
	To Cash account				xxxxx
	To Bank account				xxxxx
	(Being- loan taken ………………….)

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු =

PROBLEM: 7A

The following information is given to you by Mr Sanjay:

(a) Loan taken from Mr Pitamber Rs 150,000.

(b) Loan taken from Capital Finance Ltd Rs 200,000 by opening bank account.

Required: Journal entry

SOLUTION:

Journal Entry for American Style

Date		Debit $	Credit $
(a)	Cash account	150,000
	To Loan from Pitamber account		150,000
	To record loan received from Mr Pitambar in cash

Journal Entry for European Style

Date			€	€
(b)	Cash account	Dr	150,000
	To Loan from Pitamber account			150,000
	To record loan received from Mr Pitambar in cash

Journal Entries

In the book of Mr Sanjay

Date	Particulars		LF	Amount Dr	Amount Cr
(a)	Cash account	Dr		150,000
	To Loan from Pitamber				150,000
	(Being- loan taken from Mr Pitamber)
(b)	Bank account	Dr		200,000
	To Loan from Capital Finance Ltd				200,000
	(Being- loan taken from Capital Finance Ltd by
	opening bank account)

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු =

PROBLEM: 7B

The following information is available to you by XYZ Traders:

2 January: 15% Loan taken from Mr Pawan Rs 100,000.

1 February: 12% Loan taken from City Bank Ltd Rs 300,000 by opening bank account.

Required: Journal entry

SOLUTION:

Journal Entries

In the book of XYZ Traders

Date	Particulars		LF	Amount Dr	Amount Cr
Jan, 2	Cash account	Dr		100,000
	To 15% Loan				100,000
	(Being- loan taken from Mr Pawan)
Feb, 1	Bank account	Dr		300,000
	To 12% Loan				300,000
	(Being- loan taken from City Bank by opening bank A/c)

Keep in Mind (KIM)

Here:

15% loan mean, we must pay 15% interest on 100,000 per year.

12% loan mean, we must pay 12% interest on 300,000 per year.

Some person or financial institution takes monthly interest.

Financial institution takes interest with installment.

Some person takes interest monthly and loan amount lump sum.

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු =

PROBLEM: 7C

The following information is given you by Ms Srijana:

(a) Loan given to Ms Babita Rs 50,000.

(b) Loan given to Sabina Fancy House Rs 80,000 by cheque.

Required: Journal entry

SOLUTION:

Journal Entries

In the book of Ms Srijana

Date	Particulars		LF	Amount Dr	Amount Cr
(a)	Ms Babita’s account	Dr		50,000
	To Cash account				50,000
	(Being- loan given to Babita in cash)
(b)	Sabina Fancy House account	Dr		80,000
	To Bank account				80,000
	(Being- loan given to Sabina Fancy House by cheque)

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු =

PROBLEM: 7D

The following information is given you by SK Traders:

15 March Loan given to Mr Suraj Rs 30,000.

22 May Loan given to Kavita Concern Rs 50,000 by cheque.

28 June Invested Rs 150,000 in Nimbus Agro Ltd by cheque

Required: Journal entry

SOLUTION:

Journal Entries

In the book of SK Traders

Date	Particulars		LF	Amount Dr	Amount Cr
15 March	Ms Suraj’s account	Dr		30,000
	To Cash account
	(Being- loan given to Suraj in cash)				30,000
22 May	Kavita Concern account	Dr		50,000
	To Bank account				50,000
	(Being- loan given to Sabina Fancy House
	by cheque)
28 June	Investment account	Dr		150,000
	To Bank account				150,000
	(Being- invested in Nimbus Agro Ltd by cheque)