What is the journal entry for loan taken from a person?

When a loan is taken from a person by a business, there is an asset and liability being created. Cash is being brought into the business which increases the asset whereas the financial obligation of the company rises when a loan is taken and hence a liability increases.

For example, Mark Ltd. has taken a loan from John for $5,000. Therefore the journal entry can be shown as:

According to the modern rules of accounting, increase in assets is Debit and increase in liability is credit. The company may have taken the loan to finance its business or for some emergency. When it is time for the business to pay off the loan, they can either pay it off completely or in instalments. They must pay off the principal amount along with interest.

Now for our above example, if Mark Ltd paid off the entire loan after one year at 10% interest, then the journal entry would be:

Here, the interest on loan account is debited since an increase in expense is debited. Loan account will be debited because the obligation is now reduced and hence liability decreases. Finally, we credit cash since cash is leaving the business which implies a decrease in assets.

If the entire loan is not paid off in that year, then the balance of the loan amount will be shown in the balance sheet under the head liabilities.