How are Loans & Financing Handled?
Loans represent financing borrowed from banks, institutions, or individuals that your business is obligated to repay. They are classified as Liabilities on your Balance Sheet.
Accounting Treatment of Loans
Receiving a $10,000 bank loan:
- Debit: Cash / Bank (+$10,000 asset)
- Credit: Loan Payable (+$10,000 liability)
Frequently Asked Questions
No. A loan is not revenue and does not increase profit, because it incurs a obligation to repay. It increases cash while simultaneously increasing liabilities.
Repaying loan principal directly reduces your liability on the Balance Sheet. Paying interest or financing charges is classified as an expense on the Income Statement.
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