What Is Loan Payable?
At one point in time or another, you might have come across the phrase “loan payable” and got confused or you might not have even heard of it at all. “Loan Payable is a very popular term used in the financial industry and if you are looking to apply for a loan now or in the future, it’s very important to you. Fortunately for you, in this article we will be discussing in full details on what “Loan payable” refers to. But before we go into loan payable, let us make sure loan itself is understood. What are loans?
A loan is an agreement under which a financial institution (mostly cash in this context) gives another individual access to their property under the conditions of interest payment and guaranteed return of the property by the end of the lending agreement. The mortgage loan payment is usually provided in a promissory note.
So, in general, what is a loan payable?
Say for instance, any part of a loan payment is still payable by the time registered on the balance sheet of the company; the remaining loan balance is usually referred to as loan payable. In other words, it is the exceptional due loan balance within the valid lending period.
In the event that the principal placed on a loan is still payable within a year, it is usually referred to on the balance sheet as current liability. Any remaining portion of the principal that can still be paid in over a year’s time is usually referred to as long term liability. In the case that the loan agreement has been disregarded, but the property owner has waived the contract requirement that could still imply that the total loan is technically payable at once and can be referred to as current liability.
The interest a company might be owing on a loan later in the future might not be registered in the accounting records. Such instances are only recorded as time goes on when the interest that is being owed actually develops to an actual liability. The lender or financial institution might be required to form a reserve for accounts that are doubtful in order to offset its portfolio of loans payable. The above scenario most suitable for situations where it looks like some loans might not be repaid.
Also note that a loan payable is actually different from accounts payable in the sense that accounts payable are based on goods or services acquired and do not charge interest. A loan payable on the other hand, charges interest, and is usually based on the receipt of a certain sum of money from the lender.
Here’s a scenario for loan payable to make you understand better. A business acquires a loan of $10,000 from a financial institution and registers the loan as a credit to the account of loan payable and a debit to the account of cash. In the event that after a month, the business pays back $1,000 with interest out of the $10,000 therefore leaving $9,000. The remaining $9,000 within the valid lending period is referred to as loan payable.
Now you already have an idea what loan payable refers to you will no longer be confused whenever you come across it again. If this is your first time to encounter this financial term, make sure you fully understand the article above. This is important because it can come a long way in making you understand what lending entails especially if you plan on applying for a loan anytime soon or in the future.