Loan Question

[deane@gooroos.com]

On Wed, Dec 04, 2002 at 10:39:01PM -0500, Charles M. Gajan wrote:
>
> When booking the liability I entered the entire amount.  Loan
> = principle + interest (this is where my confusion starts).

That only makes sense if your loan is totally rigid: no early repayment
options, no late repayment options, no double-up payments, etc.  In other
words, only if the total amount of interest to be paid is fixed and cannot
change.

For example, if you immediately turned around and paid back the loan the
same day that you took it out, would you still owe them all that interest?
If so, then the interest is a liability (and you should get someone else to
do your bank negotiations for you :-), otherwise, it is not.

> 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.

Since you credited the total interest as a liability in the first place, then
you should debit it as a liability as well, not as an expense.

However, as someone else has pointed out, it makes more sense to only
credit the principle as a liability in the first place, then treat the
monthly interest payments as expenses.  Think of the interest as the "rent"
that you pay for using the money for a month.

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  - deane                          Gooroos Software: Plugging you into Maya

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