Course Outline
Join PRO

Is a loan payment an expense?

Author:
Harold Averkamp, CPA, MBA

Definition of Loan Payment

Generally a loan payment consists of:

  • An interest payment, which is an expense
  • A principal payment, which reduces the loan’s principal balance

If the interest and principal portions of the loan payment are not listed, a loan amortization schedule will indicate the amounts.

If the loan payments are made on the last day of every month, the interest payment (or interest portion of the loan payment) will likely be the expense for the month. However, if the loan payment is made on a different day of the month, an accrual adjusting entry will be required to report the precise amount of interest for the month and the accrued interest liability at the end of the month.

The loan’s principal balance is a liability such as Loans Payable or Notes Payable. The principal payments that are required in the next 12 months should be classified as a current liability. The remaining amount of principal owed should be classified as a long-term (or noncurrent) liability.

Example of Loan Payment

A company makes monthly payments of $500.00 on the last day of every month. Each month the interest portion decreases and the principal portion increases (as the result of a decreasing principal balance). A loan amortization schedule indicates that the interest portion of this month’s payment is $112.49 and the principal portion is $387.51. Therefore, the loan payment will be recorded as follows:

  • Debit Interest Expense for $112.49
  • Debit Loan Payable for $387.51
  • Credit Cash for $500.00
Join PRO to Track Progress
Must-Watch Video

Advance Your Accounting and Bookkeeping Career

  • Perform better at your job
  • Get hired for a new position
  • Understand your small business
  • Pass your accounting class
Watch the Video

Join PRO or PRO Plus and Get Lifetime Access to Our Premium Materials

Read all 2,645 reviews

Features

PRO

PRO Plus

Features
Lifetime Access (One-Time Fee)
Explanations
Quizzes
Q&A
Word Scrambles
Crosswords
Bookkeeping Video Training
Financial Statements Video Training
Flashcards
Visual Tutorials
Quick Tests
Quick Tests with Coaching
Cheat Sheets
Business Forms
All PDF Files
Progress Tracking
Earn Badges and Points
Certificate - Debits and Credits
Certificate - Adjusting Entries
Certificate - Financial Statements
Certificate - Balance Sheet
Certificate - Income Statement
Certificate - Cash Flow Statement
Certificate - Working Capital
Certificate - Financial Ratios
Certificate - Bank Reconciliation
Certificate - Payroll Accounting

About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

Learn More About Harold

Certificates of
Achievement

Certificates of Achievement

We now offer 10 Certificates of Achievement for Introductory Accounting and Bookkeeping:

  • Debits and Credits
  • Adjusting Entries
  • Financial Statements
  • Balance Sheet
  • Income Statement
  • Cash Flow Statement
  • Working Capital and Liquidity
  • Financial Ratios
  • Bank Reconciliation
  • Payroll Accounting
Badges and Points
  • Work towards and earn 30 badges
  • Earn points as you work towards completing our course
View PRO Plus Features
Course Outline
Take the Tour Join Pro Upgrade to Pro Plus