The world of finance and accounting is often very confusing. There is a lot of jargon that comes with these areas, and because of this most people only really know the basics.
Due to this, you probably will have heard of commonplace accounting terms, such as ‘loans’ and ‘assets’, but you might not know exactly what they mean.
There are some terms which you might have a better understanding of than others, for example, loans are pretty commonplace outside of accounting, and most people know what they are. But, what does a loan mean in accounting terms? And how does this affect your financial eligibility?
In this guide, we’ll be taking a look at whether, or not, a loan is considered an asset, and the financial implications of taking out a loan. So, with no further ado, let’s dive right in.
First things first, let’s take a look at what a loan is. You probably already know what a loan is because they are very common now-a-days.
Loans are something that a lot of banks and online lenders offer as a means of quick money for those in need. There are lots of reasons why people might take out a loan, it could be to pay for college costs, or to cover a month when you have ended up with less money than you expected.
Depending on the type of loan that you are taking out, there are lots of different financial implications of that loan. So, let’s take a look at what an asset is.
Now, let’s take a look at what an asset is. Just like with loans, you have probably heard of an asset. But, this is a term that is much more commonly used in accounting and finance.
In this scenario, an asset is a resource that is owned or controlled by a business. An asset is seen as a positive piece of finance for a business, and they tend to include cash/cash equivalents, real estate/land, and personal property – vehicles, equipment, etc.
Generally speaking, an asset is a positive figure in a business’s financial records, so is a loan considered an asset?
Based on what we have told you so far, you probably already have an idea of what the answer is going to be. But, your idea might not be correct. It is easy to assume that a loan will not be considered an asset, simply because it isn’t ‘real’ money.
When you take out a loan, you take out a repayment plan, and often a high interest rate on top of this loan. So, you might expect a loan to be considered a negative, or a liability as it is called in accounting terms, however this isn’t the case.
In personal finance terms, a loan is often considered to be a negative. This is primarily because when you take out a loan, you will then be faced with a monthly repayment schedule.
It is this monthly payment schedule that can impact your eligibility for further loans, mortgages, and other terms of finance.
But, in accounting terms, a loan is actually considered to be an asset. In a balance sheet, your total loan amount will be listed as a ‘current’ asset. This is because you have immediate access to the cash benefit of that loan.
However, a loan is a double-edged sword. This is because the loan will also be listed as a liability (negative) on your balance sheet.
The only time that a loan will only be considered as an asset is when it will be repaid within a year, in this situation the loan will only be listed as a ‘current’ asset.
So, yes, a loan is considered an asset when it comes to accounting. But, that loan is also considered to be a liability.
The cash figure that you receive from the loan will be considered an asset, but the debt that you accept will be considered to be a liability. But this is just in terms of personal finance, so let’s take a look at what a loan means for banks.
As we have established, a bank loan is considered both an asset and a liability in terms of personal finance. But, what do loans mean for a bank?
Well, as you would likely expect, for the banks who offer a loan, this is considered an asset. In fact, loans actually make up the largest portion of assets for most banks. This is because assets for a bank can be categorized into two categories.
– What the Bank Owns – real estate, computers and equipment, government bonds, physical cash in their tills, etc.
– What the Bank is Owed – mortgages, loans, overdrafts, etc.
This might be a little hard to comprehend, mainly because you might be wondering how something that the bank doesn’t physically have can be considered an asset.
When a bank offers you the money for a mortgage or loan, they hand that cash over to you, so they no longer have it. So, how can it be considered an asset? Let’s take a look.
When a person, or business, takes out a loan or mortgage with a bank, they commit to repaying the loan to its full amount. Often, they will also be required to put down collateral.
The contract that the borrower signs is worth as much as the repayment terms, so this contract alone can be considered an asset. This is why loans and mortgages can be considered an asset for the bank that offers them.
In short, yes, a loan can be considered an asset. In personal finance, a loan will be considered an asset in terms of the cash that you have, but a liability in terms of the cash that you owe.
Whereas, for banks, a loan will be considered an asset because every person who takes one out has committed to a repayment contract. So, yes, a loan is considered an asset.