Employee Loan "workaround"

Hi Guys
After fiddling with the Pay slip and digging through the forum i haven’t found a workaround for my problem. here i go!

‘JACK’ is an employee at 'ABC Company’
JACK’s monthly salary is $1000 (for simplicity sake let’s omit other deductions / contributions etc)
JACK has obtained a loan from ‘ABC Company’, a sum of $12,000 and he has obliged to settle the loan by deduction $100 every month from his salary.

My questions are:

  1. How to assign the loan for JACK - a) add him as a customer? b) create a pay-slip?

    as mentioned above JACK intends to payback in $100 per month to settle the loan, in the pay-slip when i assign the salary and reduce $100 under deductions as ‘Loan’ - the employee section shows JACK has repaid $900 from his $12,000 loan “under PAID IN ADVANCE column” - which is not accurate at all

    The accurate balance should be $11,900 “under PAID IN ADVANCE column”

  2. what is the work around for the above?

Please advice.

Assuming you used Spend money to record transfer of funds to Jack and allocated the payment to Employee clearing account => Jack, under the Employees tab, you should see a Paid in Advance amount for Jack. But this is not necessarily the $12,000. It will be the net of $12,000 and any amount already owing to Jack from payslips. Drill down on the Paid in Advance balance and you will see all transactions in Jack’s subaccount. No doubt, you already owed Jack some money. Until you made the loan, that amount would have shown under Amount to Pay.

Thanks for the feedback Tut

Here’s what I did, To pay the loan to employee

  1. I made a “spend money” and selected the cash account
  2. Under the “Accounts” I selected “Liabilities-> Employee clearing account”
  3. Selected the employee from the second list and amount ($12,000) and created it.

End of month, I opened the Pay slip and made a payslip for $1,000 for JACK
NOTE: I did not deduct the $100 Loan repayment amount in the Pay Slip - instead,

  1. I made a “receive money” and selected the cash account
  2. under the “Accounts” I selected again “Liabilities-> Employee clearing account”
  3. Selected the employee from the second list and entered the loan repayment amount ($100) and created it.

However the number of steps i take is more - I believe the methodology i used is correct (when it comes to repayment) because i entered the $100 in the Pay-slip section / spend money under the pay-slip, upon which “Paid in advance” Balance gets reset once again.

Your Thoughts on this would be valuable

Your steps for advancing the employee the money were correct. This was equivalent to:

Dr: Employee clearing account => Employee 12,000
Cr: Cash account 12,000

Note that at this point, if there had been no other transactions, the employee’s clearing subaccount would have a -$12,000 balance and would show up under the Employees tab as $12,000 paid in advance (which is equivalent to a negative balance).

You were incorrect in receiving money, because no money came into the business. What you should have done instead was add a line for the loan repayment when paying the employee for the month, entering -$100. Financially, this has the same net effect as receiving money, but more accurately records the actual transaction. (You would not be able to produce any documentation for an auditor showing a receipt of $100.) You were correct to allocate the repayment transaction to the employee’s clearing account.

I have simulated the following scenario in my test company:

  1. Used Spend money to loan Patricia Montfort (PM) $12,000 on September 5.
  2. Generated a regular payslip for PM on September 15 for $1,000. This keeps records straight on what PM has earned for tax purposes.
  3. Used Spend money to pay PM $1,000 for regular pay on one line and deduct $100 for loan payment on a second line on September 30.

The payment receipt looks like this:

This produces a balance history for PM as shown below:

There are no more payroll transaction forms with the loan than without, but each payment form will have one more line item until the loan is repaid. The only extra transaction is the one recording transfer of the loan to the employee.

The example outlined above would work for a single employee, but if you have multiple employees then the Employee Clearing account could get quite messy especially if other employees have loans/expense claims etc.

Also, the point of a Clearing Account is that it actually clears and doesn’t become a de facto liability account as the Loan is actually a separate independent financial transaction and not an employment entitlement such as earnings/tax deductions/superannuation etc.


  1. create a separate BS Liability account called Staff Loan and allocate the 12,000 to there.
  2. create a Payslip Deduction Item called Loan Repayment with the account Staff Loan

In the recurring payslip include the deduction item and it will be automatically deducted each month.
When making the salary payment, just pay the employee balance in the clearing account without the need of having to remember to add an extra line for the deduction.

The loan liability account shows the outstanding balance and the clearing account is cleared

I also prefer @Brucanna’s approach, because it makes it more obvious the loan is just that, a loan, and not some form of employee entitlement. It also might simplify things if the employee leaves and no longer receives paychecks. Of course, either way, you need a contractual instrument spelling out the terms of the loan. Notice that in my example, I stressed that there were no other transactions. @Brucanna is absolutely correct that the loan easily gets lost in the Employee clearing account.

The only reason I explained as I did, @Premm, is because you had already started down that path and couldn’t get the numbers to tally correctly. My first response only explained why the Paid in Advance amount was not what you expected. My second response was meant to discourage an imaginary receipt transaction that would never match anything in a cash account. Had you asked how to record a loan to an employee, I would have given you the same advice @Brucanna did. In fact, I have done just that for others on the forum.

While it has nothing to do with accounting per se, I also discourage loans to employees on general principle. Experience proves they are often not repaid and sometimes jeopardize the business. And, while legal in most jurisdictions, they can invite scrutiny from tax authorities and questions about whether favorable interest rates create reportable income for the employee that is not being taxed.

Could you please send me a sample backup to see if i’m doing it right…
because I did follow your method but there is a slight problem…

  • when i do a ‘spend money’ on the ‘cash account’ what i did was
    –> I selected “Staff Loan” from the ‘Account’ list
    –> I expected to see the ‘Employee list’ next but It did not appear, so i went straight ahead an entered the value $12,000 - doing this does not refer to whom i’ve give the loan facility

is this correct?

As @Tut have mentioned it is not good practice to sanction short term loans to staff, but work ethics have changed lately and short term loans have become a standard in our field of business else we risk the chance of loosing employees as other firms support this facility.

I hope there was a better way to present this matter.

@Brucanna did you check my solution above, that seems to work accordingly but i want to get your feedback on it.
Please advice

Staff Loan as the account name was just a suggestion, you can use the name of the employee as the account name or use Staff Loan and put their name in the description field so it appears when you drill down.
You will only see Employee List in payslip control accounts like Employee Clearing account

Thankyou @Brucanna

Still trying to get my head around, I think its best I maintain a separate ledger for the loans instead of coupling them with the payroll, at least for the moment until i totally figure the whole thing out.

Thankyou for all the support guys
You guys are the best

Just follow the steps below.

  1. To create the loan Spend Money with the Payee being the Employee

  1. Create a Payslip Deduction Item for the monthly repayment

  1. Create the Payslip and add the monthly repayment to the Deduction group.
    Note - also added is a wages tax deduction item

  1. The Balance Sheet now looks like this

To pay the Employee their December Salary - Spend Money with Account = Employee Clearing 700.

Now set it up as a Recurring Payslip and every month 100 will be repaid.


Thankyou so much for your assistance on my query
This works exactly as expected.
God Bless