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Accounting for Loans

  • 01-06-2012 9:20am
    #1
    Kaskade
    Registered Users, Registered Users 2 Posts: 366 ✭✭


    I am studying for accounting technicians exams and I'm a little confused by the accounting treatment of loans.

    Say a business takes a €6000 loan

    DR - Bank Current account €6000
    CR - Loan Account €6000

    The business has received a loan of €6k but of course they will have to pay back principal + interest (Say €7K) but I don't see the liability to pay interest on the balance sheet and i'm not sure why?

    Obviously when the loan is being paid off its,

    CR Bank Current account €120
    DR Loan Account €100
    DR Interest Expense (P&L) €20

    Thanks


Comments

  • #2
    Kaskade
    Registered Users, Registered Users 2 Posts: 366 ✭✭Kaskade


    TiGeR KiNgS wrote: »
    It comes through equity in the form of reduced retained earnings from profit

    Thanks for your help it just seems strange to me that you have a liability of say €7k (Principal + interest) but your only showing a liability of €6k


  • #3
    SBWife
    Registered Users, Registered Users 2 Posts: 1,287 ✭✭✭SBWife


    The interest accrues over time. When the loan monies are received all that is owed is the amount of the loan - after one day it's the amount of the loan plus one day's interest, after a month it's the amount of the loan plus one month's interest etc. therefore the interest only hits the balance sheet accounts after it's expensed in the P&L.


  • #4
    Kaskade
    Registered Users, Registered Users 2 Posts: 366 ✭✭Kaskade


    SBWife wrote: »
    The interest accrues over time. When the loan monies are received all that is owed is the amount of the loan - after one day it's the amount of the loan plus one day's interest, after a month it's the amount of the loan plus one month's interest etc. therefore the interest only hits the balance sheet accounts after it's expensed in the P&L.

    That makes sense thank you!


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