Hello,
Please can I have some help with a Debit/Credit issue?
I have a loan and would like to provide for the interest. I am not sure what the Accounting entries would be for this provision.
My assumption is that the if I provide 5k for the year, I will:
DR Loan Interest Expense 5k
CR Loan Interest Provision Account
Then each month when I may a payment I would:
Dr Bank
Cr Loan Interest Expense
If this is correct, then how do I clear out the Loan Interest Provision Account?
Many thank...
Replies (8)
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Release the provision to the expense account as the payments are made.
Or debit the payments to the provision, not the expense account.
Release means Dr the provision Cr the expense account.
PS Your confusion might be because the entry to record the payments in your question is back to front.
Bookeeping!!
DR Loan Interest Provision - B/S
CR Bank
with each payment of interest relating to the charge accrued in the accounts.
Just make payments
Is there any reason why you don't want to just record the monthly payments, that presumably include the interest? Seems a heck of a lot easier than messing about with a provision.
You only need to provide for that element of interest you have..
... not actually paid. As Stephuran has put it.
Accrued
... not actually paid. As Stephuran has put it.
Or, to be more precise, that which has accrued but not been paid. Interest which has neither accrued nor been paid does not need to be accounted for at all.
Monthly payments
With monthly payments, I would expect the amounts accrued and paid to largely match. That is the norm for monthly payments on loans in my experience. Unless there is a material difference between the two (e.g. because the payments are only adjusted annually and so don't follow in-year changes in the interest rate) would a provision be worthwhile.