Definition of a Loan Payment
A loan payment is likely to consist of three amounts:
- Total payment amount
- Interest payment
- Principal payment
Generally, the interest payment is related to the principal amount that is owed to the lender. Whenever a principal payment occurs, the balance of the principal amount owed will decrease. Therefore, the next interest payment will be smaller than the previous interest payment.
Example of Loan Payment
Let's assume that a company has a loan payment of $2,000 consisting of an interest payment of $500 and a principal payment of $1,500.
The company's entry to record the loan payment will be:
- Debit of $500 to Interest Expense
- Debit of $1,500 to Loans Payable
- Credit of $2,000 to Cash
The credit balance in the company's liability account Loans Payable should agree with the principal balance in the lender's records. This can be confirmed on a loan statement from the lender or by asking the lender for the principal balance.