Journal entry for loan payment with interest Example

Let’s make sure you have selected your liability and expense account as the line item of your check so it will post a payment into your loan account. Loan payables need to be classified under current or non-current liabilities depending on the maturity of loan re-payment. For example, if a loan is to be repaid in 3 years’ time, the liability would be recognized under non-current liabilities.

  • Generally, the interest payment is related to the principal amount that is owed to the lender.
  • Not every part of your loan payment is considered to be a business expense.
  • If you are buying a truck, for example, you might create an account called „Loan – Truck“.
  • It is also important to understand the terms of repayment, such as the length of the loan and any penalties for early repayment.
  • For example, the company ABC Ltd. signs a mortgage loan agreement with a bank to borrow $100,000 for 10 years with the interest of 5% per annum.

Firstly the debit to the interest expense records the accounting entry for interest on the loan for the year calculated at 6% on the beginning balance. Finally the debit to the loan account records the reduction in principal of the loan balance which is the cash payment less the interest expense. A loan payable is an obligation to a lender to repay an amount of money borrowed plus interest. Loans can be secured by collateral or unsecured and can be either revolving or term loans. Revolving loans can be spent, repaid, and spent again while term loans are fixed-rate. When the company obtains the mortgage loan, it can make the journal entry with the debit of cash account and the credit of mortgage payable account.

Journal entry for loan payment with interest

The bank may be able to provide a schedule listing all expected repayment dates and amounts for the life of the loan. Depending on the type of ledger account the bookkeeping journal will increase or decrease the total value of each account category using the debit or credit process. Every loan journal entry adjusts the value of a few account categories on the general ledger. Amortization means spreading the cost of an intangible asset over its useful life.

  • They will give you an invoice for the car and documents for the loan so you can get the information you need from those documents.
  • It can be current or non-current assets depending on the expected collection period.
  • We have discussed these journal entries very briefly in this article and an example.
  • There are many different reasons why a company might need to borrow money, such as to purchase new equipment, hire and pay employees, or purchase inventory.
  • To do this, adjust entries to match the interest expense to the appropriate period.

The first is a debit to the loan account, which reduces the balance of the loan. The second is a credit to the cash account, which decreases the balance of the cash account. Loan payments are typically made on a regular what are the different types of accountants basis, such as monthly or quarterly, and are usually made in the form of a check or electronic transfer. The payment schedule and the amount of the loan payment are determined by the terms of the loan agreement.

Accountants and Bookeepers

I’d like to add some additional details in using the journal entry for the loan. If you prefer to record the payment using a journal entry, I’d suggest reaching out to your accountant. This way, they can guide you on how to do so without messing up your account.


The interests and fees are for the Expense account when you record the payment. Now that you’ve created an account for the loan, you’ll need to create a Journal entry to apply the loan to the proper asset accounts. Ultimately, it is important to carefully consider the various options available and to understand the potential implications in order to make an informed decision about loan repayment.

Is Loan Repayment Included in an Income Statement?

To establish or develop the business, the organization may need to borrow money from a bank or other financial institution. Similarly, a formal loan-received journal entry will be necessary when the firm gets the loan’s funds. The interest expense is the expense that incurs throughout the passage of time. Hence, the company needs to account for the interest on the loan at the end of the period even though the payment is not required to be made yet.

Legal Fees Journal Entry

Mortgage payable is a type of long-term debt that the company (or individual) needs to use the real property as the collateral to secure the loan. Similar to the notes payable, the obligation of future payment will include both principal and interest from the date the company obtains the loan. Likewise, the company needs to make the journal entry for mortgage payable on the first day of receiving the cash from the loan. In this journal entry, we do not record the interest expense for the loan payable that we borrowed from the bank. This is because the interest expense on the loan occurred in the 2021 accounting period. And we have already recorded it in 2021 when we make the adjusting entry at the end of the 2021 accounting period.

This is usually the easiest loan journal entry to record because it is simply receiving cash, then later adding in the monthly interest and making a regular repayment. In this journal entry, the cash payment (credit) is recognized into two portions; one is for interest expense (debit) and another is for reduction of mortgage payable (debit). In this journal entry, only balance sheet items will be affected as the interest on mortgage payable which is an expense will only incur with the passage of time.

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