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Loans - accounting treatment of repayment of principal and interest
A loan payment often consists of an interest payment and a payment to reduce the loan’s
principal balance. The interest portion is recorded as an expense, while the principal portion is a
reduction of a liability such as Loan Payable or Notes Payable.
A business obtains a principal and interest loan of 500 at an annual interest rate of 6% to be
repaid in 3 annual loan repayment installments of 187.05 at the end of each year.
Loan Repayment Schedule
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