Loans are contractual obligations in which a lender makes a sum of money available to a borrower, which must be repaid at an agreed date or in installments. In the accounting of freelancers and small businesses, loans appear as liabilities on the balance sheet and give rise to interest expenses in the profit and loss statement.
Types of loans and typical use cases
The following loan types are particularly relevant in practice:
- Bank loans: classic follow-up financing for investments or liquidity.
- Shareholder loans: capital injections by owners; sensitive for tax and accounting (risk of disguised profit distribution if terms are not at arm’s length).
- Private loans: short-term liquidity from a shareholder/private individual to the business.
- Overdraft/Current account credit: revolving credit facility with variable utilisation.
Depending on the term, loans must be classified as short-term (<1 year) or long-term (>1 year) liabilities. The choice of loan can affect liquidity planning, balance sheet ratios and tax burden for borrowers.
Accounting recognition and typical journal entries
In practical bookkeeping, loans are generally recognized at their nominal amount. Important journal entries:
Receipt of a bank loan (example: 50,000 EUR)
Bank 50,000 EUR to Loan liabilities 50,000 EUR
Monthly interest payment (example: interest 200 EUR)
Interest expense 200 EUR to Bank 200 EUR
Repayment of part of the debt (example: repayment 1,000 EUR)
Loan liabilities 1,000 EUR to Bank 1,000 EUR
In the case of a discount (disagio) or processing fees, the commercial and tax treatment differs: a disagio is often capitalized and amortized over the term, while fees may have to be recorded immediately as operating expenses. Check documentation and tax regulations.
Balance sheet presentation, tax treatment and special features
Loan liabilities appear on the liabilities side of the balance sheet under liabilities to credit institutions or to shareholders. Correct splitting into short- and long-term is important for liquidity ratios.
- Interest — tax treatment: Interest expenses are generally deductible as business expenses and reduce taxable profit. However, note the interest limitation under Section 4h of the German Income Tax Act (EStG): with high net interest expenses the deductibility may be restricted; for very small companies an exemption threshold applies (3 million EUR net interest expense) — consult a tax advisor in complex cases.
- VAT: The granting of loans is generally exempt from VAT under the VAT Act (UStG) (financial services). Special rules apply for ancillary services or fees.
- Shareholder loans: Ensure arm’s-length terms. Too-favourable or interest-free loans can cause tax disadvantages (e.g. disguised profit distribution for corporations).
Practical tips for freelancers and small businesses
For clean bookkeeping and to avoid tax disadvantages, observe the following:
- Written loan agreement: Record term, interest rate, repayment schedule and collateral.
- Separate posting: Set up separate accounts for loan receipts, interest expense and repayments to ensure transparency.
- Maturity breakdown: Split liabilities into short- and long-term and document repayment modalities.
- Documentation for shareholder loans: Document conditions comparable to third‑party financing (market interest) to minimise tax risks.
- Regular reconciliation: Reconcile bank accounts and loan liabilities at least monthly.
If the tax treatment is unclear (e.g. disagio, interest limitation, disguised profit distribution), consult your tax advisor, as individual cases can have significant tax consequences.