Journal Entry for Loan Repayment

Every organization whether it is a big multinational company or small local company requires loan at one point of time in order to finance its operations and majority of companies which take loan will repay it to lender. Let’s look at the journal entry which will be passed in the books of account of the company when company makes loan repayment –

Loan outstanding account                               Dr

  Interest on Loan outstanding account        Dr

To Cash

In the above entry since loan is outstanding it will be debited, so that in the books of account of the company it is closed and on any debt the company which has taken debt has to pay interest on debt and that is the reason why interest on loan is debited as it is an expense for the company (Remember the rule debit all the expenses and losses) and since cash has gone out of business cash account will be credited.

It can be better understood with the help of an example, Suppose ABC firm has taken loan of $ 500000 and interest rate is 10 percent and firm repays the loan exactly after 1 year then entry on loan repayment date will be

Loan outstanding a/c         Dr                     $ 500000

Interest on Loan a/c           Dr                     $ 50000

      To cash a/c                                                               $ 550000

As one can see from the above that on repayment of loan outstanding account is debited so as to close the loan account and interest on loan for the year is also debited and since cash has gone out of business it is credited with full amount of $ 550000. This was a simple example, in real life it is much more complex because companies take multiple loans and that too are not of same maturity and hence in such cases interest calculation and repayment calculation is quite complex.

0 comments… add one

Leave a Comment

Related pages

what are the limitations of ratio analysiswhat are different types of chequespricing strategies gcsedifference between shares and debentures and bondsprepaid accounting entriesfull disclosure principle gaapconsignee copycons of dictatorshipfloating currencydvr stockpenetration pricing examplesdifference between micro and macro economics pdfunearned fees journal entrypros and cons of mergers and acquisitionsdisadvantages of financial statement analysisexamples of indirect quotationdefinition of cost push inflationunearn revenuedictatorship advantages and disadvantagesmeaning of crossing of chequeexample of monopolistic competition companyexplain payback perioddistinguish between cost accounting and management accountingdefine inferior goods in economicswhat is a floating exchange rate systemwhen to use autocratic leadershipmeaning of indirect expensesautocratic leadership style pdfforex reserve meaningmerits and demerits of privatizationmarket skimming exampleregional rural banks functionswhat is the full form of ipoadvantages and disadvantages of delegation in managementdifference between systematic risk and unsystematic riskdiminishing method of depreciationconservatism conceptregional rural banks functionsmarket skimming strategyfinal goods vs intermediate goodsconvertibility of currencydifferentiate between assets and liabilitiesterm deposit examplebearer certificate of depositdisadvantages of stocksdisadvantage of mixed economydirect quotation exchange ratewhat is conglomerate in economicsexamples of substitutes goodsexamples of mixed economic systemconservatism conceptintraday transactiondiscounting of bills meaningfinal goods vs intermediate goodsdefinition of marginal costinggst fullformadvance from customer journal entryproprietary ratio investopediadefine market penetration pricingadvantages and disadvantages of microeconomicsadvantages of autocratic management styleunearned income in accountinghypothecation of goodsadvantages and disadvantages of organizational structuresdifference between retail and wholesale bankingcapital budgeting advantages and disadvantagesexamples of period costsbalance sheet vertical analysisearned value management disadvantagesadvantages and disadvantages of population in indiaadvantages and disadvantages of central governmentdisadvantages of urbanizationmonopoly and oligopoly market structuresdisadvantage of social networking