This is general information, not tax or legal advice. Rules and rates change, so check GOV.UK or ask an accountant.
When a business borrows money, three things happen over time: you receive the loan, you repay the capital and you pay interest. Each is recorded differently, and mixing them up distorts your profit.
The key idea
- The loan itself is a liability, not income.
- Repaying the capital reduces the liability. It is not an expense.
- The interest (and any arrangement fee) is an expense and reduces profit.
Step 1: set up the accounts
Add a liability account for the loan, such as “Bank loan”, and an expense account for “Loan interest”. See the chart of accounts.
Step 2: record the money received
Example: you borrow £10,000. Record a receive money transaction into your bank account, coded to the Bank loan account. Your bank balance goes up by £10,000 and the loan liability goes up by £10,000. Profit does not change.
Step 3: record each repayment
A £250 monthly repayment normally has two parts, say £210 capital and £40 interest. Record a spend money transaction with two lines: £210 to the Bank loan account and £40 to Loan interest. Your lender’s schedule or statement shows the split.
Step 4: reconcile
Import or enter the bank transactions and match them. The loan balance in your books should agree with the lender’s statement. See bank reconciliation explained.
Other types of borrowing
- Overdraft: a negative bank balance and a short-term liability.
- Director’s loan: money between you and your company. See director’s loan account explained.
- Asset finance: record the asset, and the finance as a liability. Ask your accountant about the treatment.
Why it matters
If repayments are all coded to expenses, profit is understated and your tax is wrong. If the loan is coded as income, profit is overstated.
How AvrioBooks helps
Use bank transactions with split lines to record loan receipts and repayments, and run the balance sheet to see the liability fall. AvrioBooks does not calculate loan schedules, so use your lender’s statement. See spend, receive and transfer money.
Frequently asked questions
Is a business loan income?
No. It is a liability. Profit is not affected when you receive it.
Are loan repayments an expense?
Only the interest and fees are. The capital part reduces the liability.
How do I record a repayment that includes interest?
Use a spend money transaction with two lines: capital to the loan account and interest to an expense account.
Does AvrioBooks calculate loan schedules?
No. Use your lender's schedule or statement for the split.
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