My client, Mary, recently made a personal loan to her small business in the amount of $20,000. This personal loan actually originated from a bank, in which Mary took out in her own name, then she transferred these funds to her business bank account.
This loan is also charging interest in which Mary will have to pay back as well.
Since I always advise clients to separate out their personal and business finances as much as possible, this scenario presented an interesting challenge. So to complete the bookkeeping for these activities, here is what to do within the business books:
- Make a journal entry that credits a new “Loan From Mary” liability account in the amount of $20,000; the corresponding debit for $20,000 would be to the business bank account when these funds were deposited.
- I advised Mary to also charge the business amortized interest, via a loan contract, as well.
- So, when the business pays back the loan (from Mary) in future monthly installments, the entries to book these activities are:
- Debit the “Loan From Mary” liability account for the amount of the monthly payment; the corresponding credit would be to the business bank account to reduce this bank balance.
- Also, make a second entry to recognize the amortized interest paid: Debit an interest expense account and make the corresponding credit to the “Loan From Mary” liability account.
- Be sure to always complete an official balance reconciliation of the “Loan From Mary” liability account each month as well.
Note: AccuraBooks is a bookkeeping firm only, so please consult with your Certified Public Accountant for verification and clarification about the contents of this article.