Accounting and Journal Entry for Loan Payment


Journal Entry for Loan Payment (Principal & Interest)

Loans are a common means of seeking additional capital by the companies. They can be obtained from banks, NBFCs, private lenders, etc. A loan received becomes due to be paid as per the repayment schedule, it may be paid in instalments or all at once. Below is a compound journal entry for loan payment made including both principal and interest component;

Loan A/C Debit Debit the decrease in liability
Interest on Loan A/C Debit Debit the increase in expense
 To Bank A/C Credit Credit the decrease in Asset

*Assuming that the money was due to be paid to ABC Bank Ltd.

Traditional Rules Applied

Loan Account (Personal) – Debit the Receiver

Interest Account (Nominal) – Debit all Expenses & Losses

Bank Account (Personal) – Credit the Giver

The repayment of a secured or an unsecured loan depends on the payment schedule agreed upon between both the parties. A short-term loan is categorized as a current liability whereas the unpaid portion of a long-term loan is shown in the balance sheet as a liability and classified as a long-term liability.

 

Example

The first of two equal instalments paid from company’s bank for 1,00,000 against an unsecured loan of 2,00,000 at 10% p.a. Show journal entry for loan payment in Year 1 & Year 2.

In Year 1

Loan A/C 90,000
Interest on Loan A/C 10,000
 To Bank A/C 1,00,000

(The remaining amount of 1,00,000 due to be paid will appear in the balance sheet as a liability)

Related Topic – Journal Entry for Loan Taken from Bank

In Year 2

Loan A/C 90,000
Interest on Loan A/C 10,000
 To Bank A/C 1,00,000

(As this would be the last instalment to pay the loan, therefore, this loan will not be shown in the balance sheet after this payment)

 

Impact on Accounting Equation

After the loan is paid off the net effect of these transactions on the accounting equation will be as follows;

The assets of the company decreased by 2,00,000, liabilities reduced by a 1,80,000 and simultaneously owner’s capital went down by the interest amount i.e. 20,000.

Assets = Capital + Liabilities
-2,00,000 = -20,000 + -1,80,000

(The impact has been assessed at the end of all transactions)

 

>Read Types of Liabilities



 

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