Chapter 4

Accounting for loans

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Types of loans

• Commercial loans (they are made to

finance business operation and usually due
within a period from 3 to 6 months)
• Real estate loans which include two types:
(1) Construction loans. They are made to
finance construction and bank pays directly
to subcontractors. Interest earned is
calculated every month.
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Real estate loans (con.)

(2) Mortgage loans. They are made to

finance the purchased of a building and is
usually long term in duration (10-30)
years. Payment term requires the loan to
be amortized or paid off periodically
monthly or quarterly) over the period of
the loan. The periodic payment includes
part of the principal and the interest.

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C) Installment loans

• They are made to individuals to purchase

an automobile, house appliances, or a
ticket for vacation …etc.
They are two methods to record installment
loans:
(1)Simple interest method
(2)The discount basis

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Accounting treatments for loans

They are four types of transactions recorded

in the books with the granting of loans:
1. Payment of loan proceeds to the
borrower
2. Repayment of the loan by the borrower
3. Recording monthly accrued interest
4. Collection of interest
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Commercial loans

Example 4-1
The moon co. borrowed L.E. 20,000 on
March 11, 2005. Repayable on June 11,
2005
Commercial loans 20,000
Cashier’s checks-loans 20,000

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Commercial loans

• The loan agreement includes a provision

for renewal of the loan on the maturity
date in the amount of L.E. 10,000 and a
final maturity date of September 11, 2005.
The annual interest rate is 12%

The journal entries appear as follows:

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Journal entries

March 31

Interest receivable-commercial loans 138.08

Interest income-Commercial loans 138.08

Interest = 20,000 (loan) × 12% ×21/365 = L.E. 138.08

April 30
Interest receivable –commercial loans 197.26
Interest income- commercial loans 197.26

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Commercial loans

Interest = 20,000× 12% × 30/365 = L.E. 197.26

May 31
Interest receivable –commercial loans 203.84
Interest income- commercial loans 203.84

June 11
Interest receivable-commercial loans 65.75
Interest income- commercial loans 65.75
20,000 ×12% ×10/365 = 65.75

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Journal entries

June 11
Cash 10, 604.93
Commercial loans (new) 10,000
Interest receivable-com. Loans 604.93
Commercial loans (old) 20,000

June 30
Interest receivable-com. Loans 65.75
Interest income-com. Loans 65.75

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Journal entries

July 31
Interest receivable-com. Loans 101.92
Interest income-com. Loans 101.92

Aug. 31
Interest receivable-com. Loans 101.92
Interest income-com. Loans 101.92

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Journal entries

Sept. 11
Interest receivable-com. Loans 32.88
Interest income-com. Loans 32.88

Sept. 11
Cash 10,302.47
Commercial loans 10,000
Interest receivable –commercial loans 302,47

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Closing entry
Interest income-commercial loans 907.40

Income summary 907.40

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Real Estate loans

Example 4-2
The Egyptian contractors co. started the
construction of a building. The co
borrowed a construction loan from Alex.
Bank. The bank will allow the company a
maximum of L.E. 1,500,000 for
construction at 13% interest rate.

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Real estate loans

The bank made the following disbursements

to subcontractors:
1. L.E. 35,000 to ABC Co. on May 10, 2005
2. L.E. 50,00 to XYZ Co. on May 16, 2005

Interest receivable-real estate Loans 559.17

Interest income-real estate Loans 559.17

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