What is a line of credit?
In business a line of credit or credit line is an arrangement/commitment by a bank or other creditor with a customer. The agreement specifies an amount that the customer can borrow or use in the future, assuming that the customer’s financial condition is maintained.
For example, a company may arrange with its bank to borrow money as needed but never owe the bank in excess of $500,000. The agreement might specify that interest will be calculated by multiplying the prime rate times the loan balance.
In the U.S. many individuals have a home equity line of credit that allows them to borrow up to the amount of “the line.”
About the Author: Harold Averkamp (CPA) has worked as an accountant, consultant, and university accounting instructor for more than 25 years.He is the author of the 2010 Master Accounting Download Package which has been praised for it's ability to simplify accounting in a way that anybody can understand.
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what kind of account is the interest on the line of credit.
Thank you
Interest on a line of credit is an expense in the period in which it occurs. Interest expense is a temporary or nominal account that appears on the income statement. Interest Expense is considered a Nonoperating or Other item.
How do I post a line of credit; what account is debited and what account is credited? I can’t get my mind around this. Is the line of credit an asset or a liability? How does a line of credit affect the company’s equity account?
Certainly got us thinking here are work, expect a few replies later.