How to account for a business loan in your books

Step 1: Record the loan as a liability

Drawing down a loan increases your cash and creates a matching liability — it is money owed, not revenue. Split it between current (due within a year) and non-current (longer term) on the balance sheet.

Step 2: Separate interest from capital

Each repayment has two parts: capital, which reduces the loan liability, and interest, which is the cost of borrowing. Only the interest is an expense in your profit and loss; the capital portion just shrinks the balance-sheet liability.

Step 3: Recognise fees correctly

Arrangement fees and other loan costs are usually spread over the loan's life rather than expensed all at once, matching the cost to the periods that benefit. Check the terms and treat fees consistently.

Step 4: Watch the effect on your ratios

A new loan raises your gearing and adds interest that reduces net profit. Lenders and you both read these, so understand how borrowing reshapes the accounts — sensible borrowing that funds growth is a positive story.

Step 5: Keep it clean for the next application

Accurately accounted borrowing, serviced on time, builds a track record that strengthens future finance applications.

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