A business loan is one of the easiest things to record wrong, and one of the most expensive to leave wrong. The money arrives as a single large deposit, the payments leave as a single fixed amount every month, and neither of those two numbers is what belongs on your profit and loss statement.
Get it wrong in one direction and a loan looks like a record revenue month. Get it wrong in the other and every payment looks like an expense, understating your profit and leaving a debt on your balance sheet that never goes down. Here is how it should be recorded, step by step.
Step 1: Record the loan as a liability, not income
When the loan funds, two things happen at once. Your cash goes up, and you now owe that money back. So the deposit is recorded against a liability account, usually named for the lender or the loan, such as Loan Payable - Equipment Loan. Nothing touches revenue. Borrowed money is not earned money, and it is not taxable income.
If the lender deducted fees before funding, record the full loan amount as the liability and the fee separately. A $50,000 loan that deposits $49,000 after a $1,000 origination fee is still $50,000 owed. How that fee is deducted, all at once or spread over the life of the loan, is a question for your tax preparer, but it should never simply disappear into a smaller loan balance.
If the loan paid for something directly, such as a truck or a piece of equipment bought through dealer financing, no cash may pass through your account at all. The entry is then the asset on one side at its full purchase price and the loan on the other. The asset is depreciated on its own schedule, which has nothing to do with the loan's repayment schedule.
Step 2: Split every payment into principal and interest
Each loan payment does two jobs. The interest portion is the cost of borrowing, and it is an expense on your P&L. The principal portion pays down what you owe, so it reduces the liability and never appears on the P&L at all. A $1,200 payment might be $300 of interest and $900 of principal, and it should be recorded as exactly that: $300 to interest expense, $900 against the loan balance.
The split changes every month. On a standard amortizing loan, early payments are mostly interest and later payments are mostly principal, even though the payment amount never moves. That is why booking the same split every month produces a balance that slowly drifts away from reality.
The source for the correct split is the lender, not a guess. Ask for the amortization schedule when the loan closes, and check it against the monthly statement, which normally shows how each payment was applied. Lines of credit work the same way except the balance moves up with each draw, and the interest portion is whatever the statement says it was for that period.
Step 3: Reconcile the loan balance to the lender
A loan account should be reconciled just like a bank account. At least once a month, and without fail at year end, the balance in your books should match the principal balance on the lender's statement. If it does not, something was misapplied: a payment split incorrectly, a late fee booked against principal, an escrow amount mixed in, or a payment missed entirely.
The year-end balance matters more than owners expect. It appears on your balance sheet, it may appear on your tax return, and lenders ask for it when you apply for the next loan. It is also worth separating the portion due within the next twelve months from the rest, since a lender or buyer reading your balance sheet will want to see how much debt is coming due soon.
Money you lend your own business deserves the same discipline. If you put personal funds in with the expectation of being repaid, record it as a loan from the owner, write down the terms, and track repayments against it. Left undocumented, it tends to be treated as a contribution of capital, and the difference affects how the money can come back out.
When the loan history is already tangled
The most common version of this problem is a loan recorded correctly on day one and then every payment booked in full to an expense account for a year or two. The fix is not complicated, but it is methodical: pull every lender statement, rebuild the principal and interest split for each payment, move the principal back against the loan, and confirm the balance ties to the lender. Done any other way, it tends to get half-fixed and drift again.
Evolv Bookkeeping is $199 per month flat. Every account reconciled to its statement, loans and lines of credit included, transactions categorized against a chart of accounts built for how your business actually runs, and your P&L and Balance Sheet closed and delivered by day 2 of the following month, with 1099 prep at year end.
If the loan payments have been landing in the wrong place for months, catching up a backlog is $199 for each month behind, done within 2 days and guaranteed in writing. No contracts, cancel anytime, and you can get an instant quote on our homepage.