Loans—whether from banks, NBFCs, directors, partners, group companies, or financial institutions—are a critical part of SME finance.Incorrect loan accounting leads to:
- Misstated liabilities
- Wrong interest expense
- TDS errors
- Cashflow mismanagement
- Income Tax disallowances
- Audit qualifications
This guide explains how to properly account for loans, interest, EMIs, and related adjustments in a structured, compliance-ready format.
Loans impact the balance sheet and the Profit & Loss account.They must be recorded accurately to reflect:
- Opening and closing principal
- Interest accrued
- Interest paid
- EMI breakup
- Loan processing charges
- Security deposits and margins
- TDS (if applicable)
Incorrect loan accounting causes:
- Interest overstatement or understatement
- Wrong liability reporting
- Disallowance under Income Tax (Sec 40(a)(ia) / 43B)
- Bank covenant breach
- Group company discrepancy
- Audit remarks
To explain how SMEs should record loans, EMIs, interest, processing fees, TDS, and repayments in books, along with templates and best practices.
• Term loans• Working capital loans• Cash credit (CC)• Overdraft (OD)• Equipment finance• Vehicle loans
• Business loans• Machinery finance• Loan against property (LAP)
• From group companies• To group companies
• Unsecured• Often without interest
Each type has its own accounting and compliance requirements.
A structured method to ensure accurate, audit-ready loan books.
Bank A/c Dr
To Loan A/c
If processing fee is deducted upfront:
Bank A/c Dr
Loan Processing Fee A/c Dr (Expense)
To Loan A/c
Bank / Cash A/c Dr
To Director/Partner Loan A/c
Always create for:
- Loan principal
- Interest expense
- Interest payable
- EMI payable
- Processing fees
This ensures clarity and prevents mixing principal and interest.
Most SMEs wrongly book the entire EMI as expense.Correct treatment:
EMI = Principal Component + Interest Component
Loan A/c (Principal repayment) Dr
Interest Expense A/c Dr
To Bank A/c
When interest is due but not paid:
Interest Expense A/c Dr
To Interest Payable A/c
This ensures correct P&L reporting.
Processing fee is unless specifically for acquisition of a qualifying asset under AS 16.
Loan Processing Fee Expense A/c Dr
To Bank A/c (if paid separately)
orAdded to loan account if deducted upfront (see Step 1).
TDS is deducted
- NBFCs (unless exempt)
- Unsecured lenders
- Directors/Companies (if interest-bearing loan)
Not applicable on:
- Banks (public sector and many private banks)
- Co-operative banks for certain loans
Interest Expense A/c Dr
To TDS Payable A/c
To Lender A/c
Perform:
- Principal outstanding reconciliation
- Interest reconciliation
- Confirmations from lenders
- Amortization of processing fees (if required)
- Group loan cross-confirmation
Ensure loan balances match bank statements and amortization schedules.
CC/OD is when limits are enhanced.It is a current liability.
Purchase/Expense/Payment A/c Dr
To CC/OD A/c
Interest Expense A/c Dr
To CC/OD A/c
Subsidy should be recorded as:
Bank A/c Dr
To Interest Subsidy Income A/c
Or reduce interest expense depending on policy.
Add unpaid interest to loan principal:
Loan A/c Dr
To Interest Payable A/c
Account for:
- Forex gain/loss
- Mark-up
- Conversion differences
- Bank statement
- Interest certificate
- EMI schedule
- Closing principal outstanding
Mandatory during audits.
Interest paid vs TDS deducted vs 26AS.
- Booking entire EMI as “interest”
- Not splitting principal vs interest
- Not recording processing fees separately
- Missing TDS deduction on NBFC interest
- Treating CC/OD as income
- No ledger-wise loan reconciliation
- Not maintaining loan amortization schedule
- Group loans treated as revenue
- Not accounting for penal interest
- Unsecured loan treated as capital contribution
- Not recording accrued interest at year-end
These errors distort profitability and compliance.
Bank Dr
To Loan A/c
Loan A/c Dr
Interest Expense A/c Dr
To Bank A/c
Interest Expense A/c Dr
To Interest Payable A/c
Processing Fee Expense A/c Dr
To Bank A/c
Interest Expense A/c Dr
To TDS Payable
To Lender A/c
EMI of ₹1.2 lakh per month was booked fully as interest → overstated expense by ₹9 lakh annually.
• Separated principal vs interest• Rebuilt amortization schedule• Cleaned loan ledger• Corrected interest expense
• Accurate P&L• Correct year-end liabilities• Easy audit clearance
• Loan Amortization Template• Loan Ledger Format• Interest Accrual Calculator• TDS on Interest Calculator• CC/OD Reconciliation Template• Loan Accounting SOP