The propery way to account for business loans taken out or made by the business.
1-When a business borrows money to be used for business, the loan is either a short-term or long-term payable (liability) of the business.
It is NOT income to the business.
When the loan payments are made, the business should split the loan payment into both principal (which reduces the amount of loan outstanding) and interest expense (assuming the business is being charged interest by the lender). To make this split, the lender must provide the business with a loan amortization schedule with shows the date, total loan payment, principal portion, and interest portion of each payment.
2-If a business makes a loan to a third party, the loan is either a short-term or long-term receivable (asset) to the business.
It is NOT an expense of the business.
When the business starts to collect on the loan, the business should split the loan payment into both principal (which reduces the amount of the loan outstanding) and interest income (assuming the business charged the borrower interest). To make this split, the business will have to prepare a loan amortization schedule which shows the date, total loan payment, principal portion, and interest portion of each payment.
Properly recording and acounting for loans will allow the business to prepare accuate and complete financial statements and tax returns.
NOTE: Business loans should not be used for or commingled with personal finances. Business loans are intended for business purposes only. Business and personal finances should be kept separate.
PUT IT IN WRITING:
Loans should be put in writing to avoid any misunderstanding between the parties.
It is probably best to have an appropriate attorney draw up the detailed loan agreement. The written loan document could contain basic information such as:
1-Lender and Borrower information
2-Date loan was made
3-Total Principal Amount
5-Loan Term & Payment Due Dates
6-Collateral pledged, if any
7-Penalties for various violations
8-Detailed amortization schedule.
9-Any and all other relevant items pertaining to the loan agreement.
CALL NOW 561-746-1926 or 561-339-8102 if you have any questions or concerns or would like to schedule a FREE, Confidential, No-Obligation Tax-Saving Consultation.