When a company borrows money by taking out a loan, the borrower debits the cash account (an asset) and credits either loan payable or note payable (a liability). The lender would debit loan receivable and credit the cash account.
When interest is accrued on the loan, the borrower must record interest expense and credit interest payable (or credit the cash account if the interest is paid immediately). The lender would debit interest receivable (or the cash account) and record interest revenue.
When the loan is repaid, the borrow should (1) record interest expense for the final period, (2) debit interest payable for any previously unpaid interest, (3) debit loan payable, and credit the cash account.
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