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Loan Agreements

This comprehensive guide explains how loan agreements work in your accounting system, covering setup, payment schedules, interest accrual, and financial reporting. Written for all users — accountants and non‑accountants — it provides practical guidance following double‑entry accounting best practices.

What is a Loan Agreement?

A Loan Agreement represents money borrowed by your company (Payable) or money lent to a partner (Receivable). Each loan keeps its own currency, principal, interest terms, and repayment schedule.

Key attributes:

  • Loan Type: Receivable (you are the lender) or Payable (you are the borrower)
  • Partner: Counterparty (customer, vendor, or other partner)
  • Currency: Document currency for principal and all schedule amounts
  • Dates:
    • Loan Date: When the obligation originates or is recognized
    • Start Date: When installment schedule begins
    • Maturity Date: Optional target end date
  • Principal Amount: Initial amount of the loan
  • Duration (months): Number of installments in the schedule
  • Schedule Method:
    • Annuity: Equal total payments; interest decreases and principal increases over time
    • Straight Line Principal: Equal principal each period; total payment decreases over time
  • Interest Rate (nominal annual): Used for schedule calculations (unless using EIR)
  • EIR (Effective Interest Rate) support: Optional recalculation using EIR logic

Status:

  • Draft: Editable
  • Posted/Active (implementation detail): Used by actions; operations create posted journal entries

Where to find it in the UI

  • Accounting → Loan Agreements: Create, view, and manage loans
  • On the View page of a loan, you have action buttons for: Compute Schedule, Recalculate EIR, Accrue Interest, Post Repayment, and Reclassify Current Portion
  • Related tables in the view:
    • Schedule Entries: The periodic payment plan (payment amount, principal, interest, balance)
    • Fee Lines: One‑off or periodic fees that may be capitalized
    • Rate Changes: Effective‑date changes to annual interest used in the schedule

Tip: The header’s Help/Docs button opens this guide.

Creating a Loan Agreement

Use Create to define the baseline:

  1. Partner and Currency: Select your counterparty and the loan currency
  2. Dates and Duration: Set loan date, start date, duration months; maturity is optional
  3. Amounts: Enter Principal Amount (Outstanding Principal is tracked automatically)
  4. Terms: Choose Schedule Method and Annual Interest Rate; toggle EIR if you’ll use effective interest
  5. Save

Outcome: A Draft loan is created. You can now compute a schedule and proceed with accruals and repayments.

Compute the Repayment Schedule

Purpose: Build the amortization schedule used for accruals and repayments.

Steps:

  1. Open the loan → View page
  2. Click Compute Schedule
  3. The system deletes any prior schedule entries and recalculates the full schedule based on:
    • Principal, duration, start date
    • Schedule method (Annuity or Straight Line Principal)
    • Current or updated annual interest rate per month (Rate Changes table)

Result: The Schedule Entries table shows, for each installment:

  • Due Date
  • Payment Amount
  • Principal Component
  • Interest Component
  • Outstanding Balance After

Notes:

  • Rate Changes: If provided, they adjust the annual rate as of their effective month.
  • Currency: All schedule amounts are in the loan currency.

Recalculate using EIR (optional)

If EIR is enabled, you can re‑derive interest vs principal using the effective interest rate:

  1. Open the loan → View page
  2. Click Recalculate EIR
  3. The system recomputes the interest allocation using EIR on the carrying amount across the remaining schedule

Why: EIR is often required under IFRS/GAAP for certain loans/fees to recognize interest using the internal rate of return over the loan’s life.

Accrue Interest (periodic)

Purpose: Recognize interest expense (for Payable loans) or interest income (for Receivable loans) up to a given installment.

Steps:

  1. Open the loan → View page → Accrue Interest
  2. Fill the dialog:
    • Journal: Where to post the accrual
    • Interest Expense/Income Account
    • Accrued Interest (liability/asset) Account
    • Installment #: Which schedule period to accrue
  3. Confirm

Accounting entry (example for Payable):

  • Dr Interest Expense
  • Cr Accrued Interest

Notes:

  • The accrual amount equals the schedule entry’s interest component for the selected installment.
  • The entry date uses the schedule entry’s due date.
  • For Receivable loans, the accounts are reversed appropriately (income instead of expense).

Post Repayment (cash movement)

Purpose: Record a repayment (or receipt) for a given installment, settling accrued interest and principal.

Steps:

  1. Open the loan → View page → Post Repayment
  2. Fill the dialog:
    • Journal: Bank or Cash journal
    • Bank Account: Cash/bank GL account
    • Loan Account: Loan principal account (payable or receivable)
    • Accrued Interest Account: Same one used by accruals
    • Installment #: Which schedule period you’re paying
  3. Confirm

Accounting entry (Payable loan example):

  • Dr Accrued Interest (for that period’s interest)
  • Dr Loan Payable (principal component)
  • Cr Bank (total payment)

For Receivable loans, the direction reverses (Dr Bank; Cr Accrued Interest; Cr Loan Receivable).

Important: Loan repayments are not recorded via the Payments module. Use the Post Repayment action on the Loan Agreement. These journal entries will later be reconciled to your bank statement.

Reclassify Current Portion (periodic, typically month‑end or year‑end)

Purpose: Move the portion of a long‑term loan due within the next N months from long‑term to short‑term.

Steps:

  1. Open the loan → View page → Reclassify Current Portion
  2. Fill the dialog:
    • Journal
    • Long‑term Account (e.g., Loans Payable – LT)
    • Short‑term Account (e.g., Current Portion of LT Debt)
    • Months (e.g., 12)
    • As of date
  3. Confirm

Accounting entry (Payable loan example):

  • Dr Long‑term Loan
  • Cr Current Portion of Long‑term Loan

The amount equals the principal scheduled within the next N months from the as‑of date.

Fee Lines and Capitalization

You can record fees (e.g., origination fees) with optional capitalization.

  • If capitalized, fees affect carrying amount and may interact with EIR logic
  • Non‑capitalized fees are typically expensed when incurred

Multi‑Currency Behavior

  • The loan’s currency is fixed and used for all schedule calculations
  • Monetary amounts are stored as Money objects in the loan currency
  • When journal entries post, standard base‑currency conversions apply per your company’s settings

Interactions with Other Modules

  • Payments: Do not use Payments to post loan repayments. Payments are reserved for AR/AP settlements and partner advances. Loan cash movements are posted by the loan’s Post Repayment action.
  • Bank Statements & Reconciliation: Repayment journal entries appear in your bank ledger and will be matched to imported bank statement lines during reconciliation.
  • Lock Dates: Loan Date, accruals, and repayments respect lock‑date rules. If a period is locked, you must use an allowed date or adjust the lock.

Good Practices

  • Compute schedule immediately after creation and whenever you update terms or add rate changes
  • Accrue interest monthly; do not combine multiple months in one accrual unless policy allows
  • Use Reclassify Current Portion at period‑end for accurate current vs long‑term presentation
  • Keep consistent accounts for interest, accruals, and principal to maintain clean reporting
  • Add clear references in journal entries (the system includes structured references like LOAN‑INT/ID/SEQ, LOAN‑PAY/ID/SEQ)

FAQ

Q: Can I record a loan repayment with Payments? A: No. Use the Loan Agreement’s Post Repayment action. Payments are for AR/AP settlements and partner advances.

Q: Can I partially pay an installment? A: The current UI posts by installment. To reflect partial payments, consider splitting the schedule or post manual adjustments; future UI iterations may support partial postings.

Q: What about variable interest? A: Use Rate Changes to alter the annual rate from a given effective month; recompute the schedule to apply changes.

Q: When should I use EIR? A: When required by policy or standards to recognize interest using effective yield over the loan’s life, especially when fees are capitalized.

Need more help? Click Help / Docs from any Loan Agreement page to open this guide.