Lending money to another company or a person is something every now and then a business does. Be the reasons as always what they are, but the accounting treatment is something that does not change or differ. A money lent is money given away and a receivable recognized in return on the balance sheet.

Something that is often enough neglected, is how to treat those loans on the statement of cash flows. The biggest pitfall here is the fact that those loans are often treated as receivables from operating activities, where in fact in most cases they’re not. In those rare occasions they would be treated as operating activities receivables, is if the field of business the company is operating in is in fact financing. However, for companies that are not finance institutions, loans given out are investments. On the statement of cash flows the investment activities on their own are disclosed separately. As such, when you disclose changes in operating receivables, both the beginning and end balance should exclude any loan related balances (both the principal and interest receivable).

When you disclose loan related transactions on the statement, the first thing to note is that they are all shown gross. It’s always gross and what’s more, as such it’s also the actual cash movement and not the change in balance. What we mean under “gross” and the actual cash movement here is actually two lines – loans given (as in actual cash paid out) and loans paid back (as in the lenders paying you the money back). Yes, it ends up with the same result as it would when the balances would be included within the changes in receivables, however it would disclose the actual operating cash flows unfairly.