How to read a loan statement

business.gov.au describes a loan as borrowed money that the business repays, with interest, in instalments over an agreed term. The lender sends a statement for each period that sets out how the balance moved. It is the loan's equivalent of a bank statement.

A few terms from business.gov.au's glossary appear on most statements:

• Principal: the part of the amount borrowed that is still to be repaid, not counting interest.
• Interest: the cost of borrowing the money.
• Fixed or variable interest rate: a fixed interest rate doesn't change for the term or an agreed time, while a variable rate changes with market conditions.
• Maturity date: when the loan's term ends and everything still owing falls due.
• Balloon payment: a final lump sum due under some loan agreements, which keeps the regular repayments lower.

• Loan account number and the statement period.
• Opening balance: what was owed at the start of the period.
• Interest charged, often once a month.
• Fees, such as a monthly account fee. business.gov.au notes that loans can carry set-up costs and ongoing fees.
• Repayments received, with their dates.
• Any extra amounts drawn, on loans that allow it.
• Closing balance: what was owed at the end of the period.
• The next repayment amount and date, and sometimes the maturity date.

A line of credit or an overdraft reads a little differently. business.gov.au explains that a line of credit charges interest on the amount drawn rather than on the full limit, so the statement shows each amount drawn and repaid, and the limit alongside.

Interest is charged on the balance, so as the balance falls each repayment covers a little less interest and reduces the debt by a little more. In this example the interest charge drops each month, partly for that reason and partly because September is a shorter month.

Add up each column for the period. With no new borrowing or other adjustments, repayments less interest and fees give the net fall in the loan balance, as in this example. Subtract any additional borrowing and allow for other statement adjustments when they occur.

The last two lines agree in this example because there is no new borrowing or other adjustment. If they differ on your statement, account for those movements as well as repayments, interest and fees before deciding that an entry is missing. Ask your accountant how any unusual fees or adjustments should be recorded.

In general bookkeeping, a loan has its own liability account. The amount borrowed goes in when the loan is drawn, each repayment is recorded against the loan, and the interest and fees the lender charges are recorded as expenses on the dates the statement shows. Recorded that way, the loan account in your ledger should agree with the statement on the same date, apart from any repayment still on its way to the lender.

When the two don't agree, the usual causes are:

• whole repayments recorded as an expense, so the loan account never goes down
• whole repayments recorded against the loan, with no interest or fees recorded
• fees or interest on the statement that were never entered
• a repayment entered in the books but not yet received by the lender at the statement date.

On the balance sheet, business.gov.au lists loans due after a year or more as long-term liabilities and interest payable among current liabilities. How a particular loan is split and presented in your accounts, and how any set-up fee is treated, are questions for your accountant.

• Match every repayment to the bank statement by amount and reference, allowing for processing dates to differ, and explain any payment still in transit.
• The interest charge follows the pattern you expect. On a variable rate it can change from one period to the next.
• No fee appears that you didn't expect or can't explain.
• The next repayment amount and date match what is in your cash flow forecast.
• Any balloon payment or maturity date is in the forecast well ahead of time.

File each statement with the loan agreement and your reconciliation notes. business.gov.au says most business records need to be kept for 5 years, and it lists showing your financial position to banks and other lenders among the benefits of good records.