How to Keep Accounting Records of Loans and Credits in the Czech Republic

Many entrepreneurs rely on external sources of financing — in other words, borrowed funds — to support their business operations. One common option is credit financing. But how exactly are loans recorded in accounting?

In practice, loans have become a widely used financing tool for businesses in the Czech Republic. Entrepreneurs typically turn to loans when they need to make significant investments they can’t immediately cover from their own capital. Others may choose external financing simply because it’s more cost-effective than using their own resources.

When to Consider a Loan

Entrepreneurs often invest in equipment, vehicles, or high-value assets such as real estate to support or grow their business. In some cases, a loan can also help cover a temporary cash flow gap as part of operational financing.

The value of taking out a loan depends largely on the entrepreneur’s or company’s ability to use the borrowed funds effectively — ideally generating income that outweighs the associated costs, including interest, fees, and in some cases, insurance (such as for vehicle financing). When other financing options are unavailable or less favorable, a loan can be a practical and strategic choice.

Using and Recording a Loan

Loan accounting begins at the moment the loan is received. The bank or credit institution may either transfer the funds directly to the borrower’s account or pay the supplier’s invoice on their behalf.

If the funds are credited to the business bank account, the incoming payment is recorded in account 231 – Bank Loans (if issued by a bank). However, it’s important to include an intermediate step using account 261 – Funds in Transit, to reflect the money movement accurately. In this process, both the standard bank statement and the loan statement should be taken into account.

When the bank pays the supplier directly, the company’s obligation to the supplier is settled, but a new obligation to the bank arises. This credit liability is recorded in account 231 (for short-term loans) or account 461 – Long-Term Bank Loans if the obligation extends over a longer period.

Loan Repayment: Principal, Interest, and Other Expenses

Loan repayments are also recorded in accounting, usually in the form of regular monthly installments. However, payments can also be irregular. In some cases, regular monthly payments are made only on the principal, in others on the total amount, or sometimes only on interest.

Most payments consist of two components: principal and interest. The principal is the part by which the borrower reduces their debt to the bank or other financial institution, while interest represents the cost of using someone else’s capital.

In accounting, these two components must be recorded separately. Repayment of the principal reduces the liability and is recorded in account 231 (or account 461, for long-term liabilities). Interest is recorded as a financial expense in account 562 – Interest.

If the payment includes other costs, such as bank fees or an insurance premium, these must also be recorded separately — usually in account 568 – Other Financial Expenses or account 548 – Other Operating Expenses, depending on the nature of the expense.

Loan Reporting and Classification by Maturity

A key aspect of proper loan accounting is how loans are reflected in financial statements, particularly in terms of their classification by maturity. Loans are typically recorded under accounts 231 and 461, and when preparing the balance sheet, they must be divided into current and long-term liabilities.

Short-term loans are those that are due within one year from the balance sheet date. Long-term loans, on the other hand, have a maturity of more than one year. This classification is based not on the original loan term, but on the actual time remaining until repayment.

In practice, it’s common for an entrepreneur to take out a five-year loan, but if less than 12 months remain until its maturity as of the balance sheet date, the entire outstanding balance must be reclassified as a current liability. Even though the original agreement was for five years, this adjustment ensures a true and fair view in the financial statements, in line with accounting principles.

Loans and the Initial Cost of an Asset

When a loan is used to finance the purchase of a long-term asset, it’s important to determine which expenses can be included in the asset’s initial cost.

The acquisition cost doesn’t just include the purchase price – it also covers additional costs directly related to the acquisition, such as transportation, installation, design work, staff training, or one-time bank fees tied specifically to the financing of that asset. A complete list of such qualifying costs is defined in the implementing regulation of the Accounting Act.

Loan interest can also form part of the initial cost – but only up until the moment the asset is put into use. After that, any further interest becomes a regular financial expense, recorded in the current accounting period.

Other ongoing costs not directly linked to the acquisition – like credit account maintenance fees or insurance premiums – are excluded from the initial cost and accounted for separately.

At 360WEDO, we help businesses in the Czech Republic navigate complex accounting rules and optimize their financial reporting. Whether you’re dealing with asset acquisition, loan processing, or balance sheet preparation – our team is here to support you with expert, clear, and compliant solutions.

Reach out today to simplify your accounting and focus on growing your business.

Source:

https://www.podnikatel.cz/clanky/uvery-v-ucetnictvi-aneb-kdyz-nam-chybi-penize/?utm_source=push&utm_campaign=2025-06-18