What is the entry?
Example numbers: a 1,500.00 payment, of which 400.00 is interest and 1,100.00 is principal.
| Account | Debit | Credit |
|---|---|---|
| Loan payable | 1,100.00 | |
| Interest expense | 400.00 | |
| Cash | 1,500.00 |
The loan balance falls by 1,100.00. The profit and loss statement shows 400.00 of interest. Cash falls by the full 1,500.00.
Where do the two numbers come from?
From the lender’s statement for that payment, or from the amortization schedule. The split changes every month: the interest part is largest in the first payment and falls each month, and the principal part grows. A fixed split copied from month to month is wrong by the second payment.
Why does the loan balance not match the lender?
- The whole payment went to the loan. The balance is too low and interest expense is missing.
- The whole payment went to expense. The balance never falls and expenses are overstated.
- The payment includes more than the loan. Escrow for taxes or insurance, or a late fee, is inside the payment and needs its own line.
- The schedule is an estimate. With daily interest, paying a few days early or late changes the split. So does a variable rate.
- Extra principal was paid. The schedule no longer describes the loan.
How do I tie it out?
At least once a year, and at every year end, compare the loan balance in the books with the lender’s statement on the same date. Correct the difference in the open period. If the principal in the books is too low by 60.00 because interest was under-recorded, the correction debits interest expense and credits the loan for 60.00.
What about the end of the month?
On accrual-basis books, record the interest that has built up since the last payment, with a credit to accrued interest payable. It reverses when the payment is made. Nothing in the bank feed reminds you of this entry. That is why the loan schedule gets a check of its own at close.
How does LedgerDock handle loans?
Each loan keeps its own amortization schedule. The scheduled entry posts the principal and the interest, and the “Schedules posted” check fails at close if this month’s entry is not in the ledger. The month cannot lock until it is posted or the reason is written down. See how a close works.