How to reconcile a loan account

business.gov.au's glossary describes a loan as money a business borrows and repays in instalments, plus interest, over a set time. In your books the loan is a liability: it goes up when money is borrowed and when interest or fees are added to it, and down as repayments reduce what is owed.

The lender keeps its own record of the same debt and sends statements. Reconciling compares the two at the same date and works out what makes up any difference between them.

• the lender's statement for the period, showing the opening balance, interest, fees, repayments and closing balance
• the loan agreement and any repayment schedule, which set out the loan term, the interest rate and whether it is fixed or variable, and the fees
• your own loan account, brought up to the statement date
• the bank statements showing each repayment leaving the business account
• the last loan reconciliation, with any items it left open.

business.gov.au lists the loan term, the interest rate, whether that rate is fixed or variable, and set-up costs and ongoing fees among the ways loans differ. Those details decide what should appear on each statement.

Lenders present interest in one of two common ways, and your entries need to follow whichever your statement uses.

• Interest added to the balance: the lender charges interest to the loan, and each repayment comes off the balance in full. Record the interest as a debit to interest expense and a credit to the loan, and each repayment as a debit to the loan and a credit to the bank.
• Each repayment split: the statement shows how much of each repayment went to interest and how much to principal. Record the repayment as a debit to interest expense for the interest part, a debit to the loan for the principal part, and a credit to the bank for the total.

Set the lender's figures and your books side by side, from the opening balance through each movement to the closing balance. Any line that differs points straight to the cause.

The interest and the fee are on the statement but not in the books, so they are recorded in June, on the dates the lender charged them: a debit to interest expense and to bank fees, and a credit to the loan. The repayment left the bank on the last day of June, but the lender processed it in July, so it is a timing item that should appear on the next statement.

• Interest or fees the lender charged that your books don't yet show: enter them against interest expense and bank fees.
• A repayment split differently from the statement: correct the split so interest and principal match the lender's figures.
• A repayment you recorded that the lender hasn't yet processed: a timing item to look for on the next statement.
• Extra repayments or further drawdowns: check each against the bank statement and record it against the loan, not against income or expenses.
• Something on the statement you don't recognise: raise it with the lender and list it as an open item until the lender answers.

business.gov.au's glossary describes a current liability as one due for payment within 12 months, and its balance sheet template places loans due after a year or more among long-term liabilities. A loan repaid in instalments usually has a part of each. The repayment schedule shows how much principal falls due in the next 12 months, and your accountant can confirm the split for the balance sheet.

Interest owed but not yet charged at the balance date may need an accrual. business.gov.au's template lists interest payable among current liabilities.

• Line of credit: business.gov.au describes it as a revolving loan you can draw on up to a pre-approved limit, paying interest only on what you have borrowed. Reconcile it the same way, with each drawing and repayment as a movement.
• Overdraft: business.gov.au describes it as a line of credit attached to the business bank account, so it is checked as part of the bank reconciliation.
• Finance for equipment, such as a hire purchase agreement or a chattel mortgage: the statements can be reconciled the same way, but how the agreement is set up in your accounts is a question for your accountant.

Reconcile each loan when its statement arrives, and always at 30 June, the end of the Australian financial year. File the statements and the loan agreement with each reconciliation. Most business records, bank records included, need keeping for 5 years according to business.gov.au.