Brief Description:- When a business firm takes loan without any security against the loan that is called unsecured loan. The loans can be given by the person who is connected to the business firm directly or indirectly but outsiders also can give the loan to the business firms. The risk in unsecured loan is that in case of default of repayment of loan by the company, the money lender can not claim against any assets. Following are some important points,  on the basis of which,  any outsider may agree to give loan to a business firm without any security:-

a)      Good reputation or goodwill of the company.

b)      Good management of the company.

c)      Good performance of the company.

d)      Sound financial position of the company.

e)      Attractive future plan of the company.

f)      Demand of the product of the company.

Examples:- Loans from directors and other shareholders, loans from partners, loans from relatives, temporary bank overdraft, loan from employees  and loan from  outsiders etc.   Now a days, we find that so many financially strong companies accept loans in form of fixed deposit with out any security.  Both parties get the benefit in this type of arrangement because the depositors get more interest than bank rates and companies easily gets fund from open market without too much difficulties. Unsecured debentures are also issued in the market to get loans.

Accounting Treatment:- Following entry is made for unsecured loans:-

Debit: Bank or Cash Account

Credit: Lender Account

Treatment of Unsecured Loans in Final Accounts

Unsecured loans are shown in liability side of balance sheet.

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