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How to account for a Loan to Company?

Situation:

a person or Entity (with no Customer/Supplier relation) has given a loan to your Company which needs to be paid back over a given period (let’s say 12 Installments over a period of 2 years (so one installment each quarter).

how can you set this up in the accounting? Logically there is a liability which needs to be balanced out over time, so there should be a payable account involved. However as soon you want to use a payable account in a journal entry ERPNext requires a “party” to be added.

As a workaround I was thinking to use a Shareholder as a party (which is not correct though, because there are no shares of the company being issued against a loan, …
As far as I know there is no way to create a Party Type (which would be the next idea that came up)

Has anyone handled such a scenario successfully and can advise on a way to do this?

Perhaps create the lender as a supplier work supplier group lender and book the loan as:

Dr Cash
Cr Supplier (Lender)

I thought something along those lines but am getting an error when trying to save such a Journal entry

Value too big
Journal Entry Account, Row 1: 'Party Type' (Supplier) 
will get truncated, as max characters allowed is 5

image

can’t really make sense on that error. Especially as noting actually gets truncated. It’s just not possible to save the JV

this is solved by changing the value of the field length in the Journal Entry Account Doctype.

then ERPNext can be cheated in the way you’ve suggested. It hurts somehow, but works. thanks

Loan from Shareholders is common. It needs to be a liability account in the COA. You can then debit bank and credit loan from Shareholder

Loan from non supplier entities can be handled in similar way. For example, create a liability account - Loan from Bank XYZ. Interest payment is booked under interest expense and loan repayment, would credit bank and debit loan account.

Generally Supplier is a party that supplies a good or service - would not mix the two.

To me that sounds more logical then the “Supplier” workaround.
The downside in using a Shareholder as Party is that such a loan does not appear on the “Accounts Payable” report which by default only allows “Suppliers” instead of all Parties of type Payable.

Do you have any suggestion to overcome that problem? I am lacking the know-how on adjusting the A/P report in a way that it includes all “payable” Parties.

Generally, Accounts Payable is used for Suppliers or other entities actively engaged in trade activity. Loans are categorized as liability and can still be payable in short time. So it is not in good form to include Loans under Accounts Payable.

Having said that, you can make a group on COA called A/P and have two accounts under it - Trade Payables and Loans Payable. Journal entries accordingly.

ERPNext will show individual and group totals and you will still have separation of accounts.

Actually, it shouldn’t appear under Accounts Payable. At the time of booking the loan you are free to override the balance sheet account where the liability should be reflected with a Loan Liability account.

So you’re booking against the supplier so that you have a named party to whom you owe a loan and can distinguish it from other parties that have also given you loans but on the balance sheet it reflects under loan liabilities.

that’s what I am doing. And I couldn’t say why it should be different. An existing loan is a liability and it’s important that, when looking at your Accounts Payable Report, you should be able to see how much money in total the company owes (no matter to whom) in order to make financial decisions based on that information I’d say.

Can you kindly elaborate why in your opinion, a loan should not be shown as a liability on an Accounts Payable report?

same question … why, in your opinion should a loan not be shown in the Accounts Payable report?

also, in your example … what kind of account is the “Secured Loan” account if it isn’t a Payable account?

Liabilities are also a “Payable” for the company - and you can build a report to include them. Loans and A/P both fall under a liabilities account. As I understand it - Accounts Payable term is used (per GAAP?) generally for “Trade” Payables. Loans are generally separated - do not know the case for your country. It may have something to do with who stands first in line in case of collections.

I agree that Loan from Shareholders should not appear in Accounts Payable but in LIabilities under Loans. My question what should be the Account Type in Chart of Account for Loan from Shareholders. If we use Payable it reflect under payable and if we use as Equity it reflects as Assest. I am confused as where it has to be appear so it correctly reflect in the Cash Flow and other Financial Statements. Appreciate if someone can help in this regard.

Recording a Loan (from anybody) should be a liability - it is a payable. When you make the Journal Entry - the cash received goes into bank account (debit) and credit to Loan from Shareholders.

the Accounts Payable report (which is what I am referring to here) shows the current liabilities of your company. So what you what you say here is a bit contradicting.