How to record a business loan and loan payments

A loan is not income

When the bank deposits a loan, you have more cash, but you also owe the same amount back. Neither side touches the profit and loss. The cash goes up and a liability called the loan goes up by the same amount.

Say a business borrows $30,000 at 7.5% a year, repayable monthly over five years. On the day the money arrives:

Give each loan its own liability account, named so you can match it to the lender's statement ("Truck loan – First Bank"). A loan repaid within a year is a current liability. A longer loan is long-term, with the part due in the next twelve months shown as current at year-end.

Splitting each payment

The monthly payment on this loan works out to $601.14. Not all of it is an expense. Part pays the interest for the month, which is an expense. The rest pays down the principal, which only reduces what you owe.

Interest for a month is the balance owed times the annual rate divided by 12. For the first month that is $30,000 × 7.5% ÷ 12 = $187.50, so $413.64 of the payment goes to principal. Next month's interest is calculated on the lower balance, so a little more goes to principal each time. That pattern is the amortization schedule:

The first payment is recorded like this:

Over the first year the business pays $7,213.68. Only $2,075.76 of that is interest expense. The other $5,137.92 reduced the loan. Over the whole five years, interest comes to about $6,068.

The most common mistake is posting the whole payment to interest or to a "loan payments" expense. Profit looks lower than it is, and the loan balance on the balance sheet never goes down. Interest on money borrowed for the business is generally deductible in both countries. Principal is not.

Compare with the lender's statement. Many lenders charge interest by the day, so their split can differ by a few cents or dollars from a monthly schedule. When it does, use the lender's figures.

If you pay extra, all of the extra goes to principal. The next month's interest is lower, and the loan ends early.

Loan fees

Origination, application, appraisal and legal fees for getting the loan are not interest for the month. They are not a normal expense in the year you pay them either. For tax, both countries spread them out:

• United States: points and other costs of getting a loan on business property are generally deducted over the life of the loan, not in the year paid (IRS Publication 535).
• Canada: fees for getting a business loan are deducted 20% a year over five years, whatever the loan's term. If you repay the loan early, you deduct whatever is left that year (CRA, T2125 line 8710).

In the books, record the fee as an asset and expense a slice of it each month. A $600 fee on this five-year loan comes to $10 a month on either basis:

If the lender takes the fee out of the loan, the deposit is $29,400 but the loan is still $30,000. Debit Bank $29,400 and Prepaid loan fees $600, and credit the loan $30,000.

A vehicle or equipment bought with a loan

Often the money never passes through your bank. You buy a $36,000 work truck, pay $6,000 down, and the dealer arranges a $30,000 loan. Record the full cost of the truck as an asset, and the loan for the part you have not paid:

From here there are two separate stories. The loan is paid down with the principal and interest split above. The truck is depreciated over its useful life, or written off under the tax rules for depreciation (US) or capital cost allowance (Canada). The loan payment is not the depreciation, and the depreciation is not the loan payment. Your accountant sets the depreciation for tax.

In Canada, interest on a loan for a passenger vehicle is capped. For loans made on or after January 1, 2026 the limit is $350 a month. Our truck's $187.50 is under it. Pickups and vans used mainly for business can fall outside the passenger-vehicle rules, so check the vehicle's category with your accountant.

In AcboBooks you set the loan up under Loans with its rate, term and payment. It shows the amortization schedule and records each payment as one cheque, already split between interest and principal, with an optional extra principal amount. Under Fixed Assets you can post the purchase as part paid, part financed, and link the asset to its loan. The register then shows the truck's book value next to what you still owe on it.

Year-end checks

• Match the loan balance in your books to the lender's year-end statement. If they differ, the interest and principal split was off somewhere. Adjust the difference between interest expense and the loan.
• Split current and long-term. Here, $5,536.77 of principal falls due in the next twelve months (payments 13 to 24). That is the current portion.
• Accrue interest if a payment date falls after year-end but part of its interest belongs to the old year. Your accountant may ask for this.
• Keep the loan agreement with the year's records. It is the evidence for the rate, the fees and the term.

The loan account should reconcile to the lender every month, just like a bank account. See how to reconcile an account and the monthly closing checklist.