Loan Repayment

If I took a loan from Bank for an amount of $70,000.00, I will journal it into my Loan principal account. For loan account, I usually create three accounts, one main and two sub-accounts, such as:

Loan from Bank (main account)

Loan Principal (Sub-account)

Loan repayment (sub-account)

For monthly repayment, I will be using a write cheque method; Payee will be the Bank (or financial institution) and the account used will be Loan principal account and Loan Interest expense account. If I paid $2,300.00; out of this payment, $1,400.00 was for Interest expense and $900.00 was the principal repayment; the double entry for this transaction will be debit Loan Repayment account (B/S) $900.00, debit Loan Interest Expense (P/L) account $1,400.00 and credit Bank account $2,300.00.

In Balance Sheet:

Loan from Bank

Loan Principal: $70,000.00

Loan Repayment: -900.00

Total Loan: 69,100.00

Take a look at the Profit & Loss report, it will shows the Loan Interest expense account as $1,400.00.