How are loans between funds reported in financial statements?

Loans between funds are reported in financial statements as increases and decreases in assets and liabilities. This treatment reflects the nature of loan transactions where one fund essentially provides a financial asset (the loan) to another fund, creating a corresponding liability for the borrowing fund.

When a fund loans money to another fund, the lending fund records an increase in its assets, reflecting the receivable from the borrowing fund. Conversely, the borrowing fund records an increase in its liabilities, documenting its obligation to repay the loan. This dual-entry accounting approach ensures that both sides of the loan transaction are accurately represented in the financial statements, maintaining the integrity of the overall financial position of the reporting entity.

This approach is particularly important in public sector accounting, where different funds may have specific purposes and functions, and accurately tracking loans is crucial for transparency and accountability among those funds. Recognition of such transactions as increases and decreases in assets and liabilities aligns with sound accounting principles, helping stakeholders understand the financial implications of inter-fund borrowing.