How are a short-term bank loan and its interest recorded?
The loan itself is not an expense, but the interest is. Four basic journal entries with accounts 6810, 6920 and 9610, using a dairy plant as an example.
With the arrival of spring, the "Oqtosh Sut" dairy plant began receiving a lot of milk from farmers. There was not enough money for raw materials, so the plant took a six-month loan from the bank. The director, Feruza, asked the accountant: "Does taking out a loan mean a loss for us?"
The answer: the loan itself is neither a loss nor income. Only the interest is an expense.
What changes on the balance sheet when a loan is received?
200 million soum arrived from the bank. The plant has more money, but exactly the same amount of debt has appeared. Both sides grew equally, and profit did not change.
Short-term loans are recorded in account 6810 "Short-term bank loans", and the interest payable in 6920 "Accrued interest". Both are liability accounts.
What journal entries are made?
The amounts in the example are hypothetical: a loan of 200 000 000 soum, interest of 4 000 000 soum per month.
| Step | Transaction | Debit | Credit | Amount |
|---|---|---|---|---|
| 1 | The loan arrived in the settlement account | 5110 | 6810 | 200 000 000 |
| 2 | Interest accrued at month end | 9610 | 6920 | 4 000 000 |
| 3 | Interest paid to the bank | 6920 | 5110 | 4 000 000 |
| 4 | The loan repaid at the end of the term | 6810 | 5110 | 200 000 000 |
Steps 2 and 3 are repeated every month. Over six months, the total interest expense will be 6 × 4 000 000 = 24 000 000 soum. It is exactly this amount that reduces the plant's profit.
Why do we record interest at month end rather than on the day it is paid?
Interest builds up for every month the money is used. Even if the bank collects it later, the expense belongs to that month. That is why it is first accrued (9610 / 6920) and then paid (6920 / 5110). A credit balance in 6920 means "we owe the bank interest".
9610 is a transit account: at the end of the period it is closed to 9900 "Final financial result".
When are other accounts used?
| Situation | Debit | Credit |
|---|---|---|
| The bank transferred the loan money directly to the supplier | 6010 | 6810 |
| The loan was taken for a term of more than one year | 5110 | 7810 |
| The loan was taken for construction (capital investment), interest accrued | 0810 | 6920 |
The last row deserves special attention. Under NAS No. 24, interest directly attributable to an asset that takes a substantial period of time to get ready for use (a qualifying asset) is added to the cost of that asset rather than to expenses.
Where does the loan appear in the statement of cash flows?
According to NAS No. 9, bank loans received belong to financing activities. So both the loan proceeds and the repayment are shown in the financing activities section of the statement.
Test yourself
5 questions on this topic: pick an option or reveal the answer.
"Kitob sabzavot" LLC paid its tax debt to the budget out of a short-term bank loan: the bank transferred the money directly to the budget rather than to the company's settlement account. What journal entry is made?
In which account are short-term bank loans recorded?
A bank granted the company a short-term loan, and the loan money was transferred directly to a supplier to settle the company's debt to it. Which journal entry is made?
"Termiz don" JSC issued 2 000 bonds with a 9-month term: the nominal value is 50 000 soum, each was sold for 52 000 soum, and the money arrived in the settlement account. How is this recorded under NAS No. 21?
"Oltin mezon" LLC bought 400 shares of another company at 25 000 soum per share (not a subsidiary; a short-term financial investment). It paid 120 000 soum for broker services and 30 000 soum for bank services. Under NAS No. 12, what is the acquisition cost of the shares?
Answered: 0 / 50 of 5 correct
All tests →See also
Sources
- NAS No. 21 "Chart of Accounts", paragraphs 292, 299, 296, 309, 336 and 75 · accounts 6810 and 6920 (292, 299); receiving a loan, paying a supplier from it and repaying it (table in paragraph 296); accruing and paying interest (table in paragraph 309); long-term loan 5110/7810 (table in paragraph 336); interest on capital investment 0810/6920 (table in paragraph 75)
- NAS No. 24 "Accounting for Borrowing Costs", paragraph 10 · borrowing costs related to a qualifying asset are included in the cost of the asset
- NAS No. 9 "Statement of Cash Flows", paragraph 7 · bank loans received belong to financing activities
- Example and amounts · prepared by the author, hypothetical