Every business, big or small, needs funds to operate and grow. They often take loans from banks to manage operations, expand activities, or purchase new assets. The loan taken from a bank journal entry records the money received and creates a liability in the accounting books. The correct format of this entry is:
| Bank A/c Dr. To Bank Loan A/c |
The journal entry on loan taken from bank adds the money to the bank account and shows that the business must repay the bank later. This simple entry is very important in the accounting system. If this is not recorded properly, the financial records will be incorrect. All accountants must understand how this entry works. It is one of the first transactions taught in accounting classes. This article will explain everything in detail for Indian students, from basics to examples.
What is a Loan?
A loan is an amount of money that a person or company borrows from a bank or lender. It is not free; it must be repaid within a specific time along with interest. The bank and borrower agree on repayment terms before the money is given. The interest depends on the amount, the period, and the agreement between the parties. Loans are helpful when the business needs funds for operations, machinery, office expansion, or salaries.
In accounting, a loan is not recorded as income. It is a liability because the borrower must repay the bank. When a business gets a loan, it gets cash in the bank account, but it also accepts the responsibility of paying it back. The amount must be clearly shown in the balance sheet under “Liabilities.” There are many types of loans, like working capital loans, term loans, and overdraft loans.
Working capital loans help businesses manage daily needs. Term loans are taken for big purchases like land, buildings, or equipment. Loans can be secured, where the business gives something valuable as security, or unsecured, where the loan is given based on credit history. A secured loan has lower interest but needs collateral. Unsecured loans have higher risk and come with higher interest rates.
In every case, the accounting must treat the money as borrowed funds. When you take a loan, it affects two accounts – a Bank Account and a Loan Account. Both these accounts are part of basic journal entries in financial accounting. Every accounting student must understand the meaning and importance of this entry.
Loan Taken from Bank Journal Entry with Example
When a business gets money from the bank, it must pass a proper accounting entry. This helps the company keep its books updated and accurate. The loan taken from a bank journal entry is a simple entry where one asset account increases (Bank) and one liability account increases (Loan). You debit the bank account because the money comes in. You credit the loan account because you owe it.
Journal Entry Format
| Bank A/c Dr. To Bank Loan A/c(Being loan received from the bank) |
This entry is simple but very important. You must pass this entry on the date the loan is received. You should also include a narration to explain the transaction.
Example On Loan Taken from Bank
Suppose XYZ Pvt. Ltd. receives a loan of ₹5,00,000 from SBI Bank on 1st April 2025. The journal entry in the books will be:
Bank A/c Dr. ₹5,00,000
To SBI Bank Loan A/c ₹5,00,000
(Being loan received from SBI Bank)
This entry adds ₹5,00,000 to the company’s bank balance. It also shows that the company owes ₹5,00,000 to SBI Bank. It is important to mention the bank’s name clearly in the narration.
Accounting systems use various terms for this, such as:
- Journal entry for a loan from a bank
- Loan received journal entry.
- bank loan accounting entry
- journal entry for taking a loan
- bank loan journal entry with an example
If you skip this entry or enter it wrong, it can create problems later. The balance sheet will not match, and the business will face confusion during audits. So always record this entry as soon as the loan is credited to your bank account.
Also, remember, at this point, you do not record any interest. Interest will come only when it is paid or due. Always make sure to keep your loan ledger separate from interest records. Use clear account names for better tracking.
How to Record Bank Loans in Accounting Books?
Recording the loan correctly in books helps in keeping your accounts clean. You must record each transaction related to the loan – receiving, interest, repayment, and closing. This section explains the full process step-by-step.
When a business receives a loan, it increases its bank balance and creates a loan liability. So, one asset goes up, and one liability goes up, too. The double-entry rule applies here. Let’s understand the flow.
- Loan received: Record the journal entry when the loan is credited to your bank account. Debit the Bank A/c and Credit the Loan A/c for the amount received. This entry updates both the asset and liability sides of your books.
- Loan ledger creation: Create a separate loan account under the liabilities head in the ledger. Name the account based on the loan provider, like “SBI Loan A/c.” This helps track outstanding amounts clearly.
- Interest payment: Record monthly or quarterly interest as an expense in your books. Debit the “Interest on Loan A/c” and Credit the “Bank A/c.” Do not combine interest and principal in the same ledger.
- Principal repayment: When you repay the loan, reduce the loan liability from your books. Debit the “Loan A/c” and Credit the “Bank A/c” for the repaid amount. Record this entry every time an EMI or repayment is made.
- Bank reconciliation: Match your accounting entries with the bank’s loan statement each month. Check for any difference in interest, charges, or missed entries. Correct mismatches quickly to keep records accurate.
When you use software like Tally, you can enter the loan easily through vouchers. You select Journal Voucher and make the same debit and credit entries. Always use proper narrations.
Example Ledger View
In this ledger, you can track how much of the loan still needs to be paid. It also shows the interest cost every month. Businesses must check this ledger regularly. This record is also known by names like how to record loans in the journal, bank loan entries in a tally, or journal entries of bank loans taken.
| Date | Particulars | Debit (₹) | Credit (₹) |
| 01-Apr-25 | Loan Received | 5,00,000 | |
| 01-May-25 | Principal Repaid | 50,000 | |
| 01-May-25 | Interest Expense | 5,000 |
Updating these ledgers regularly helps avoid confusion at the year-end. You also stay prepared for audits and financial reports. Every business, big or small, must follow this process.
Journal Entry for Bank Loan Repayment
After receiving the loan, the company needs to pay it back. Loan repayment has two parts – principal and interest. You must record both in separate accounts. Interest is recorded as an expense, and principal repayment reduces the liability.
Let us continue with the same example. XYZ Pvt. Ltd. pays ₹55,000 to SBI Bank on 1st May 2025. Out of this, ₹50,000 is for principal, and ₹5,000 is for interest.
Journal Entry for Repayment
SBI Bank Loan A/c Dr. ₹50,000
Interest on Loan A/c Dr. ₹5,000
To Bank A/c ₹55,000
(Being repayment of ₹50,000 principal and ₹5,000 interest)
This entry reduces the loan by ₹50,000. It also records ₹5,000 as an expense. The total of ₹55,000 goes from the bank account. Students often make the mistake of combining principal and interest in one account. That is wrong. Always keep interest in a separate ledger under indirect expenses. If the bank charges processing fees or late fees, you record them under Bank Charges A/c. You can also use Tally to record these entries.
Steps in Tally
Recording a loan taken from a bank journal entry is a fundamental concept in accounting that every commerce student and aspiring accountant must master. Whether you’re working in a small firm or a large corporation, loans are a common source of finance. That’s why knowing how to accurately record a journal entry for a loan taken from the bank both manually and using accounting software like Tally is crucial.
A loan is treated as a liability for the business and must be properly recorded in the books to reflect accurate financial standing. Misstating this entry could result in skewed financial reports and legal issues down the road. With increasing digitization in accounting practices, software like Tally ERP 9 or TallyPrime has made it easier and more systematic to handle such transactions
- Use Payment Voucher (F5): Select this to pass the loan repayment transaction in Tally. It allows you to enter both principal and interest values correctly.
- Debit Loan A/c and Interest A/c: Enter the repayment amount against the loan account. Debit the interest part under “Interest on Loan” to show as expense.
- Credit Bank A/c: Credit your bank account since the money goes out of your company’s bank account. This completes the double-entry transaction properly.
- Add narration like “EMI paid including interest.”: This helps anyone understand the entry during audits. Clear narration improves transparency in accounts.
Keep a repayment schedule handy. Most banks give this when the loan starts. It shows how much to pay every month. Update your books after every payment.
Loan repayments also affect your cash flow. It reduces the money in the bank. So businesses plan repayments properly. If they miss payments, it affects their credit scores. So, every repayment entry must be made on time and accurately.
Relevance to ACCA Syllabus
Understanding how to record loan transactions is essential under financial reporting, a core component of the ACCA syllabus. Students must grasp the proper classification, recognition, and presentation of liabilities in accordance with IFRS standards such as IFRS 9. This foundation is critical for advanced financial accounting, consolidation, and audit.
Loan Taken from Bank Journal Entry ACCA Questions
Q1: What is the correct journal entry when a business receives a loan from a bank?
A) Debit Bank, Credit Loan Payable
B) Debit Loan Payable, Credit Bank
C) Debit Expenses, Credit Loan Payable
D) Debit Bank Charges, Credit Loan Payable
Ans: A) Debit Bank, Credit Loan Payable
Q2: Under IFRS 9, how is a loan liability initially measured?
A) Fair value plus transaction costs
B) Nominal value
C) Face value minus interest
D) Historical cost
Ans: A) Fair value plus transaction costs
Q3: In financial statements, where is a bank loan usually shown?
A) As a revenue item in the income statement
B) As a liability in the statement of financial position
C) As an expense in the income statement
D) As equity in the statement of financial position
Ans: B) As a liability in the statement of financial position
Q4: If a loan is repayable after 18 months, how is it classified?
A) Current Asset
B) Non-Current Asset
C) Current Liability
D) Non-Current Liability
Ans: D) Non-Current Liability
Q5: Which of the following is a key disclosure for bank loans in financial reporting under IFRS?
A) Market trends
B) Terms and conditions of the loan
C) Sales Volume
D) Auditor’s fees
Ans: B) Terms and conditions of the loan
Relevance to CFA Syllabus
The CFA curriculum covers financial statement analysis extensively, including recognition and classification of liabilities. Understanding how loans impact financial statements, interest expense, and cash flow is essential for analyzing a firm’s capital structure and solvency. It is a core skill in equity and credit analysis.
Loan Taken from Bank Journal Entry CFA Questions
Q1: When a company borrows from a bank, which of the following accounts increases?
A) Cash (Asset)
B) Retained Earnings
C) Accounts Receivable
D) Common Stock
Ans: A) Cash (Asset)
Q2: How is a long-term loan recorded in the statement of financial position?
A) As an operating liability
B) As equity
C) As a long-term liability
D) As a deferred tax asset
Ans: C) As a long-term liability
Q3: Which financial statement shows the repayment of a bank loan?
A) Income Statement
B) Cash Flow Statement – Investing Activities
C) Cash Flow Statement – Financing Activities
D) Statement of Changes in Equity
Ans: C) Cash Flow Statement – Financing Activities
Q4: Interest paid on bank loans is shown under which section in the cash flow (indirect method)?
A) Operating Activities
B) Investing Activities
C) Financing Activities
D) Retained Earnings
Ans: A) Operating Activities
Q5: What does a high proportion of loans on the balance sheet typically indicate?
A) High profitability
B) High liquidity
C) High financial leverage
D) High dividend payout
Ans: C) High financial leverage
Relevance to CMA Syllabus
The US CMA syllabus emphasizes financial planning, performance, and control. Recording bank loans accurately affects budgeting, ratio analysis, and long-term financial planning. It’s vital for preparing compliant and strategic financial statements.
Loan Taken from Bank Journal Entry CMA Questions
Q1: What is the immediate accounting impact when a business receives a bank loan?
A) Increase in Revenue
B) Increase in Asset and Liability
C) Increase in Expenses
D) Decrease in Equity
Ans: B) Increase in Asset and Liability
Q2: In management accounting, what does a bank loan signify in terms of risk?
A) Market Risk
B) Operational Risk
C) Liquidity Risk
D) Financial Risk
Ans: D) Financial Risk
Q3: Which of the following loan interest appears?
A) Statement of Financial Position
B) Cash Flow Statement
C) Income Statement
D) Statement of Retained Earnings
Ans: C) Income Statement
Q4: The classification of a loan as a current liability depends on:
A) The interest rate
B) Repayment period within 12 months
C) Company’s liquidity
D) Depreciation method
Ans: B) Repayment period within 12 months
Q5: Which of the following would not affect the journal entry of a bank loan?
A) Loan term
B) Interest rate
C) Repayment schedule
D) Sales Volume
Ans: D) Sales Volume
Relevance to CPA Syllabus
For CPA candidates, accurate journal entries are fundamental to the FAR (Financial Accounting and Reporting) section. Loans are integral to understanding liabilities, interest expense treatment, and regulatory disclosures under US GAAP.
Loan Taken from Bank Journal Entry CPA Questions
Q1: According to US GAAP, how is a bank loan initially recognized?
A) At nominal value
B) At fair value minus costs
C) At principal value
D) At fair value
Ans: D) At fair value
Q2: Which of the following is not part of a typical journal entry for receiving a bank loan?
A) Debit to Bank
B) Credit to Loan Payable
C) Debit to Interest Expense
D) None of the above
Ans: C) Debit to Interest Expense
Q3: When interest is accrued on a bank loan, what is the correct journal entry?
A) Debit Loan Payable, Credit Cash
B) Debit Interest Expense, Credit Interest Payable
C) Debit Interest Receivable, Credit Interest Income
D) Debit Bank, Credit Interest Expenses
Ans: B) Debit Interest Expense, Credit Interest Payable
Q4: Where would accrued loan interest appear on the financial statements?
A) Under current liabilities
B) Under intangible assets
C) Under equity
D) Under long-term investments
Ans: A) Under current liabilities
Q5: Which accounting principle supports the accrual of interest on loans?
A) Matching Principle
B) Historical Cost Principle
C) Consistency Principle
D) Entity Principle
Ans: A) Matching Principle
