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How should an interest only loan be recorded?

The principal balance of an interest only loan is a liability. If none of the principal is due within 12 months of the date of the balance sheet, the entire principal balance is reported as a long-term liability.

If the current month's interest is paid on the last day of each month, there will be no interest liability. Each month's payment of interest will be debited to Interest Expense and will be reported on the income statement. Under accrual accounting the interest that has occurred but has not been paid as of the date of the balance sheet, is reported as a current liability such as Interest Payable or Accrued Interest Payable and is also reported as Interest Expense on the income statement. Future interest is not reported on the financial statements.