How do I record a business loan in my accounts?

2 min read

Liability on balance sheetThe outstanding balance

Split each paymentCapital vs interest

Interest = expenseIn profit and loss

Fees per treatmentAsk your accountant

Where the loan sits

When the loan is drawn, the cash comes in and a matching liability — the amount owed — appears on the balance sheet, split between amounts due within a year and after a year. As you repay, that liability reduces by the capital portion of each payment. The balance sheet always shows what you still owe, which is your outstanding balance, not the total of remaining payments.

Splitting each repayment

Every repayment does two accounting jobs. The capital portion reduces the balance-sheet liability — it is not an expense. The interest portion is a cost of the period, recorded as an interest expense in the profit and loss account, where it reduces profit and is generally tax-deductible. Your amortisation schedule gives the split for each payment, which is exactly what your bookkeeping needs.

Fees and getting it checked

Loan fees are recorded according to their nature — some expensed as incurred, some spread over the loan term — so follow your accountant's treatment rather than lumping them in with interest. Keeping the loan liability, the interest expense and the fees cleanly separated makes your accounts accurate and your tax deductions correct. See the management accounts guide.

Pull the interest/capital split from your repayment schedule, and confirm the postings with your accountant.

Frequently asked questions

Is the loan itself an expense in my accounts?

No — receiving the loan is not income and repaying the capital is not an expense; the loan is a balance-sheet liability. Only the interest (and certain fees) hits the profit and loss account as a cost. Treating a whole repayment as an expense would overstate your costs and understate profit, so the capital and interest must be split.

Where does the interest show up in my accounts?

In the profit and loss account, as an interest or finance expense for the period, which reduces your taxable profit. The capital repayments do not appear there — they reduce the loan liability on the balance sheet. Recording interest as an expense and capital as a liability reduction is what keeps both the accounts and the tax position right.