Comparing Loans & Investments

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  • 0:04 Comparing Loans & Investments
  • 0:39 Accounting Paperwork
  • 2:19 Example
  • 2:56 Lesson Summary
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Lesson Transcript
Instructor: Kevin Newton

Kevin has edited encyclopedias, taught middle and high school history, and has a master's degree in Islamic law.

Loans and investments can both be very useful tools used by businesses to grow. However, when looking at accounting paperwork, it can be easy to confuse them. In this lesson, we clarify that confusion and show how to use both.

Comparing Loans & Investments

While easy enough to separate in the real world, loans and investments can cause some confusion in the accounting world. After all, both involve relatively large changes in the balance sheet at a moment's notice, but more incremental changes over time. Further, the fact that loans are often used to finance investments makes things even more confusing!

Luckily, in this lesson, we're going to walk through all of that and make it less obtuse. We'll see how loans and investments look on accounting paperwork, as well as identify their respective uses within a company. Following all that, we'll take a look at an example that demonstrates how each works.

Accounting Paperwork

First, let's start with how loans and investments look on company paperwork. Remember that a loan represents an injection of money that has to be repaid. As such, when a loan first appears on a company's accounting and financial records, it is likely to be as a relatively large amount of cash. However, following that, a chunk of cash will be debited for each term for the remainder of the loan's life up until it's been paid off.

In contrast, an investment is something that a company spends money on in hopes of making a future profit. As such, an investment will first show up on a company's paperwork as a large debit. However, two positive figures should come on a company's future records. The first of these is the increased income from the investment itself.

The second, especially from an accounting point of view, is depreciation. Depreciation refers to the amount of use that a company got out of something. As such, it is referred to as a credit. While that may sound weird, think about it like this: The use of a machine or another investment is constantly giving back and, in this case, that 'giving back' is the depreciation.

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