Brief Description:- As we know that a business firm need proper funds to run its business smoothly. Mainly, the money is being invested by the owners of the firm or shareholders of the company. If the company needs more funds then it takes loans from outsiders. Some time what happens is that the company is new in the market and is not so much popular but it needs more funds for business. In such type of cases, any outsider who gives the loan to the company, would not like to take any risk and the company also does not have any other option except to provide some security to lender against the loan taken. By doing so, both parties may avoid the hurdles between the smooth running of business. Therefore, when the loans are accepted by the business firm against some security then we call these types of loans as secured loans. In case of secured loans, the management should make a special note that there should not be any lapse in respect of the repayment of secured loans or interest thereupon to avoid unwanted troubles.
Examples:- Loan can be taken against the security of fixed assets which are salable easily in open market. In other words, if a company defaults in making the repayment of loan, the money lender gets the right to sell the assets which have been mentioned as security in the contract of loan.
Secured debentures are also one of the examples of secured loan.
Bank also gives the overdraft against security of inventories or fixed deposits or other valuable assets etc.
Accounting Treatment:- Following journal entry is passed at the time of accepting the secured loans:-
Bank or Cash A/c Dr.
To Lender A/c
Treatment of Secured Loans in Final Accounts
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