Loan in the German commercial and legal context denotes the temporary provision of financial resources against repayment and usually interest. For the accounting of freelancers and small businesses, a loan is a typical source of financing that must be recognised on the balance sheet as a liability and reflected in the profit and loss account through interest expense.
Types of loans and typical uses
In day-to-day business, loan forms differ by purpose, term and structure. Important types include:
- Investment loan / term loan – purpose-bound for purchases such as machinery or company vehicles, typically medium- to long-term.
- Overdraft / credit facility – short-term liquidity reserve on the business bank account, variable drawdowns and repayments.
- KfW or subsidised loans – favourable conditions with specific collateral or purpose restrictions.
- Leasing and hire purchase – an economic alternative, but not always legally classed as a loan.
For accounting it is crucial to understand the impact of taking out a loan on liquidity, the balance sheet structure (equity vs. debt) and interest expense.
Accounting treatment
Correct posting and period allocation are important to keep the balance sheet and income statement meaningful.
Taking out the loan
When funds are received the bank balance is increased and simultaneously a liability to the lender is recorded. Typical journal entry:
- Bank to Loan payable
Interest and fees
Interest expenses are recognised as an expense. On payment, journal entries for example are:
- Interest expense to Bank (on payment)
If interest has not been paid by the reporting date, it must be accrued:
- Interest expense to other liabilities (or provisions, depending on the case)
Repayment
Repayment instalments reduce the loan liability and the bank balance:
- Loan payable to Bank
Loan discount and ancillary loan costs
Ancillary loan costs such as a loan discount (disagio/damnum), processing fees or notary fees are treated differently under commercial and tax law. It is common to spread such acquisition or financing costs over the term of the loan; the exact treatment is governed by the HGB and tax rules and should be agreed with your tax adviser.
Tax and legal aspects (HGB, EStG, UStG)
Relevant legal bases for accounting and tax treatment are primarily the German Commercial Code (HGB) and the Income Tax Act (EStG). Key points:
- Presentation in the financial statements: Under the HGB loans are shown as liabilities on the liabilities side. Distinguish between short-term (<1 year) and long-term (>1 year).
- Cash-basis accounting vs. balance sheet accounting: For the cash-basis profit determination (EÜR) under §4 (3) EStG the receipt/payment principle applies: transactions are recorded when cash is actually received/paid. Under balance sheet accounting according to the HGB period-appropriate accruals must be made.
- VAT: The mere granting of a loan is generally not subject to VAT (no VAT-liable consideration for financing services under the VAT Act).
For special subsidised loans, securities (mortgage, guarantee) or the treatment of a loan discount, additional legal and tax rules apply.
Practical examples and journal entries
Concrete situations from practice illustrate the implementation in bookkeeping:
| Case | Journal entry |
|---|---|
| Taking out a loan of €50,000 | Bank to Loan payable €50,000 |
| Monthly interest payment €200 | Interest expense to Bank €200 |
| Repayment instalment €1,000 | Loan payable to Bank €1,000 |
Note for freelancers and small businesses: keep full documentation of loan agreements, monitor repayment schedules and fixed-rate periods, and check effects on ratios such as liquidity, equity ratio and interest coverage ratio. If you are unsure about commercial or tax law details, especially regarding loan discounts, capitalisation requirements or accruals in the cash-basis accounting, consult your tax adviser.