A loan is a credit to the borrower and a debit to the lender’s loan receivable.
A loan feels straightforward until you try to record it. Your bank calls it “credit.” Your accounting software asks for debits and credits. Your statement breaks payments into lines that don’t match your ledger names. That’s when people flip entries and spend an afternoon fixing them.
Here’s the clean way to think about it: a loan is a relationship. One side owes money. The other side is owed money. So the label depends on whose books you’re working in. Once you lock in that viewpoint, the entries stop being mysterious.
What Debits And Credits Signal
Debit and credit are not “minus” and “plus.” They are directions inside double-entry bookkeeping. Every transaction hits at least two accounts, and the total debits match the total credits.
Most people remember the direction rules faster when they tie them to account types:
- Assets rise with debits and fall with credits.
- Liabilities rise with credits and fall with debits.
- Equity rises with credits and falls with debits.
- Income rises with credits.
- Expenses rise with debits.
If your software hides the “Dr/Cr” labels, those rules still control what the app is doing behind the scenes.
Why Loans Look Different On Borrower And Lender Records
“Loan” is not a single account that means the same thing everywhere. It describes a contract between two parties.
- Borrower side: the loan balance is money owed, so it sits in a liability account with a credit balance.
- Lender side: the loan balance is money expected back, so it sits in an asset account (loan receivable) with a debit balance.
So yes, the same loan can be a credit in one ledger and a debit in another.
Are Loans Debit Or Credit? In Basic Accounting Terms
Start with the day the loan is created. The borrower receives value and takes on an obligation.
Borrower Entry When The Loan Is Funded
Assume you borrow $10,000 and the funds hit your bank account.
- Debit: Cash (asset rises)
- Credit: Loan Payable (liability rises)
Lender Entry When The Loan Is Funded
The lender sends out cash and receives a legal claim to repayment.
- Debit: Loan Receivable (asset rises)
- Credit: Cash (asset falls)
That’s the core pattern. Standards like IFRS 9 Financial Instruments set out how entities classify and measure financial assets and liabilities, including loans.
Borrower View: The Entries You’ll Use Month After Month
One Payment, Two Pieces
Most loan payments split into interest and principal. Interest is the cost of borrowing. Principal reduces what you owe.
Let’s say your monthly payment is $250, made up of $180 interest and $70 principal.
- Debit: Interest Expense $180
- Debit: Loan Payable $70
- Credit: Cash $250
That split matters. If you put the full $250 into the loan payable, your balance may still match the statement after a while, yet your expense totals will be off.
Interest That Builds Up Before You Pay
Some borrowers post interest as it accrues, then pay it later. In that case, you can record:
- Debit: Interest Expense
- Credit: Interest Payable
When you send the payment, you clear the payable:
- Debit: Interest Payable
- Credit: Cash
The CFPB explanation of principal and interest in a mortgage payment lines up with how statements usually show these pieces.
When The Lender Pays A Vendor Directly
Sometimes you borrow to buy equipment, and the lender pays the seller instead of depositing cash to you. You still received value, just not in cash form.
- Debit: Equipment (or the asset you bought)
- Credit: Loan Payable
Fees: Separate Them So Reconciliation Stays Calm
Fees come in a few flavors: origination fees, servicing fees, late fees, and prepayment charges. Your goal is to mirror what changed in cash and what changed in amounts owed.
Fee paid up front in cash:
- Debit: Loan Fee Expense (or a deferred charge you amortize)
- Credit: Cash
Late fee billed and unpaid:
- Debit: Fee Expense
- Credit: Fee Payable
Lender View: The Same Payment With Opposite Signs
Loans As Receivables
To a lender, a loan is “credit extended.” The Federal Reserve’s Consumer Credit (G.19) release description uses that exact framing when it explains what its consumer credit statistics include.
Recording Interest Income
When interest is earned, it becomes income for the lender. Income rises with credits.
- Debit: Cash (when collected) or Interest Receivable (when accrued)
- Credit: Interest Income
Recording Principal Collections
Principal reduces the loan receivable. Since the receivable is an asset with a debit balance, reducing it is a credit.
- Debit: Cash
- Credit: Loan Receivable
US reporting rules set out financing receivables and related disclosures in guidance tied to ASC Topic 310. The Financial Accounting Foundation’s Receivables (Topic 310) publication is a public entry point into that area.
Common Loan Entries Side By Side
Use this as your posting map. “Dr” means debit and “Cr” means credit. Account names can vary; directions stay steady.
| Loan Event | Borrower Entry (Dr / Cr) | Lender Entry (Dr / Cr) |
|---|---|---|
| Loan funded to borrower | Dr Cash; Cr Loan Payable | Dr Loan Receivable; Cr Cash |
| Lender pays vendor for borrower purchase | Dr Asset Purchased; Cr Loan Payable | Dr Loan Receivable; Cr Cash |
| Monthly payment (split) | Dr Interest Expense; Dr Loan Payable; Cr Cash | Dr Cash; Cr Interest Income; Cr Loan Receivable |
| Interest accrued, unpaid | Dr Interest Expense; Cr Interest Payable | Dr Interest Receivable; Cr Interest Income |
| Interest paid after accrual | Dr Interest Payable; Cr Cash | Dr Cash; Cr Interest Receivable |
| Extra principal payment | Dr Loan Payable; Cr Cash | Dr Cash; Cr Loan Receivable |
| Late fee assessed, unpaid | Dr Fee Expense; Cr Fee Payable | Dr Fee Receivable; Cr Fee Income |
| Loan paid off in full | Dr Loan Payable; Dr Interest Expense (if due); Cr Cash | Dr Cash; Cr Loan Receivable; Cr Interest Income (if due) |
Terms That Trick People
“Credit” On A Bank Statement
Bank statements often label incoming money as a credit to the account. That’s bank language, not your chart of accounts. If your cash rises, your ledger entry is a debit to cash.
“Debit” On A Loan Statement
Some loan servicers mark charges as debits and payments as credits inside the statement. Again, that is statement language. Translate it into your ledger using account types and what changed.
Capitalized Interest
Some loans add unpaid interest to principal. On the borrower side, you move an amount from interest payable into loan payable:
- Debit: Interest Payable
- Credit: Loan Payable
No cash moves, yet the loan balance rises.
Refinancing
Refinancing is often two postings: close the old loan, open the new one. If the new lender pays the old lender directly, you can still book it as if cash came in and went out, then reconcile to the payoff statement. It keeps the trail clean.
Fast Self-Checks Before You Save The Entry
These checks catch most mistakes in under a minute.
Tag Each Account As Asset Or Liability
Write “asset” or “liability” next to the account name. Then apply the direction rules. If you mark loan payable as a liability, a rise in the balance must be a credit entry.
Match The Loan Balance Movement
Take last month’s principal balance, subtract principal paid, add any amounts added to principal, then compare to the new principal balance on the statement. If it ties out, your principal posting is on track.
Keep Interest Out Of Principal
Interest belongs in an expense account (borrower) or an income account (lender). Mixing it into the loan balance can hide the real cost of borrowing and distort profit reports.
| Question To Ask | What It Means | Direction To Record |
|---|---|---|
| Did cash go up? | An asset increased | Debit cash |
| Did cash go down? | An asset decreased | Credit cash |
| Did the loan payable rise? | A liability increased | Credit loan payable |
| Did the loan payable fall? | A liability decreased | Debit loan payable |
| Are you recording interest for the period? | Borrowing cost or lending income | Debit expense (borrower) / credit income (lender) |
| Was a fee billed and not paid yet? | Amount owed without cash movement | Credit payable (borrower) / credit income (lender) |
A Posting Routine That Stays Consistent
If you post loans often, set up a routine that you follow every time:
- Enter the cash movement first.
- Split the payment into interest and principal using the statement’s breakdown.
- Check the new principal balance against the statement before you close the month.
That’s it. When your debits and credits match and the principal balance ties out, you’re done.
Main Points To Keep Straight
A loan is a credit balance on the borrower’s ledger because it is a liability. A loan is a debit balance on the lender’s ledger because it is an asset. Payments usually split into interest and principal. Interest runs through expense or income accounts. Principal changes the loan balance.
If you ever get lost, go back to two questions: “Which side am I recording?” and “Which account type changed?” The answer will tell you whether the loan line is a debit or a credit in that entry.
References & Sources
- IFRS Foundation.“IFRS 9 Financial Instruments.”Explains classification and measurement rules for financial assets and liabilities, including loans.
- Consumer Financial Protection Bureau (CFPB).“Principal And Interest Payment Versus Total Monthly Payment.”Defines principal and interest inside a typical mortgage payment.
- Board of Governors of the Federal Reserve System.“Consumer Credit (G.19) About.”Describes what counts as consumer credit in the G.19 statistical release.
- Financial Accounting Standards Board (FASB).“Receivables (Topic 310).”Background material tied to reporting and disclosure for financing receivables.