Loan Payable
Definition
A loan payable is a liability representing money the business has borrowed and must repay. Each loan payment has two parts: principal (reduces the loan balance) and interest (an expense).
Example
A business borrows $20,000. The monthly payment is $500, of which $450 is principal and $50 is interest. The loan balance drops to $19,550 and $50 of interest expense is recorded.
Why It Matters
Loan proceeds are not revenue, and principal payments are not expenses. Recording them correctly keeps both the Balance Sheet and P&L accurate.