Loan Question

Conrad Canterford conrad@mail.watersprite.com.au
05 Dec 2002 18:47:01 +1100


On Thu, 2002-12-05 at 14:39, Charles M. Gajan wrote:
> I was looking back in the archives to investigate a problem I am having
> with a loan.  I found the messages reflected my understanding of the
> procedure for booking the loan and depreciation.  However, I am a
> confused.  When booking the liability I entered the entire amount.  Loan
> = principle + interest (this is where my confusion starts).  When making
> my monthly payment I credit checking, debit liability for the principle,
> and debit interest expense for the interest.  Should I have only the
> principle reflected in the liability account?  If not, how will it ever
> reduce to zero.  Any help in clarifying will be appreciated.
> Chas. 

I didn't see a reply to this. The correct answer is that the liability
is only the principle, not the principle and interest. The interest is
an expense.

If you want to do it the other way around, every month (or however often
it acrues) you need to have a transaction that adds the interest to the
liability, and then your payment goes entirely on the liability. In some
respects this is a more accurate reflection of what goes on, but its
also more work (two transactions, rather than one transaction with the
payment split into two accounts).

Conrad.