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27 maj 2024 · Interest, on the other hand, is the cost of borrowing that principal amount, calculated based on the loan’s interest rate. These two elements are intertwined, yet they serve distinct purposes in the repayment process.
How to do a loan journal entry for transactions for bank loans, car loans, intercompany loans, and loan forgiveness including loan amortization
Interest-only loans are popular ways of borrowing money to buy an asset that is unlikely to depreciate much and which can be sold at the end of the loan to repay the capital. For example, second homes, or properties bought for letting to others.
The principles of amortised cost accounting mean that interest must be recorded on the amount outstanding. This is relatively straight forward for many instruments. For example, on a $10m 5% loan, with $10m repayable at the end of a three-year term, interest would simply be recorded as $500,000 a year.
Accounting for loan payables, such as bank loans, involves taking account of receipt of loan, re-payment of loan principal and interest expense. Liability for loan is recognized once the amount is received from the lender.
There are some bank loans where the business will make repayments that are interest-only. This means at the end of the term (or life) of the loan, the entire original sum borrowed must be repaid.
