How to deal with a loan provided to a business or employee

This article explains the steps you need to take in FreeAgent if your business has provided a loan to another business or an individual, such as an employee.

If your business received a loan from an individual, find out how to deal with a loan from an individual instead.

You’ll need to follow the steps below to add a new asset category for the loan and then explain the bank transactions associated with the loan once they’ve been imported into your FreeAgent account via a bank feed or uploaded from a bank statement.

Please note that if you created a dummy bank account to represent the loan, you should continue to explain the bank transactions as transfers between the dummy bank account and your business account, rather than following the steps below, until the loan has been repaid in full.

You’ll need to have full level (8) access to your FreeAgent account to follow the steps below.

1. Add a new asset category

First, add a new asset category in FreeAgent by selecting 'Settings' from the drop-down menu in the top right-hand corner of the screen and then selecting 'Accounting Categories'.

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Select ‘Current Asset category’ from the ‘Add New’ drop-down menu.

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Enter a name for the category in the ‘Description’ field and choose a new nominal code number for it.

Please note that FreeAgent will only let you pick certain codes - for example, ‘Current Assets’ can only range from ‘671’ to ‘720’ - and some of the codes will already be taken by FreeAgent's existing categories.

Choose where the category should be reported on your Final Accounts report from the ‘Reporting Type’ drop-down menu. If you’re unsure which category to select, please ask your accountant.

Once you’ve chosen a nominal code, select ‘Create Category’ to save this new category.

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2. Explain the bank transactions

Next, you’ll need to explain the bank transactions associated with the loan that are paid out of and into your business bank account.

Money paid out of your business bank account

Once you’ve paid the money and the relevant transaction has been imported into your business bank account in FreeAgent, navigate to the ‘Banking’ tab at the top of the screen and select ‘Bank Accounts’ from the drop-down menu.

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Choose the relevant bank account from the list.

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Select the transaction that you’d like to explain.

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Select ‘Other Money Out’ as the transaction ‘Type’ and choose the asset category you created from the ‘Category’ drop-down menu.

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Select ‘Explain Transaction’ to complete the process.

This will create a balance in the new asset account for the amount of the loan, which would be recorded as an asset on the Balance Sheet because the loan is money that you expect to get back.

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A record of the bank transaction being explained will also appear in your Audit Trail report.

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Money paid into your business bank account

When your business receives loan repayments into your business bank account, select ‘Other Money In’ as the transaction ‘Type’ and choose the asset category you created from the ‘Category’ drop-down menu.

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Select ‘Explain Transaction’ to complete the process.

This will reduce the amount in the asset category on the balance sheet as the business is no longer owed the full amount of the loan.

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A record of the bank transaction being explained will also appear in your Audit Trail report.

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Paying interest on the loan

If your business plans to charge interest on the loan, you'll need to split the bank transaction between the asset category you created for the amount of the loan repayment and the amount of interest.

When allocating the amount that is interest, select ‘Other Money In’ as the transaction ‘Type’ and ‘Interest Received’ as the transaction ‘Category’.

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A record of the bank transactions being explained will also appear in your Audit Trail report.

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