Provision For Loan Interest

Provision For Loan Interest

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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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By johngroganjga
13th May 2015 10:10

Release the provision to the expense account as the payments are made.

Or debit the payments to the provision, not the expense account.

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By Zain01
13th May 2015 10:23

Thanks johngroganjga but

Thanks johngroganjga but please can you break that down with the clear Dr and Cr?

Still confused.

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By johngroganjga
13th May 2015 10:51

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.

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By sumo69
13th May 2015 11:51

Bookeeping!!

DR Loan Interest Provision - B/S

CR Bank

with each payment of interest relating to the charge accrued in the accounts.

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Stepurhan
By stepurhan
13th May 2015 11:59

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.

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By Democratus
13th May 2015 12:37

You only need to provide for that element of interest you have..

... not actually paid. As Stephuran has put it.

 

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Replying to PJ30:
By johngroganjga
13th May 2015 12:39

Accrued

Democratus wrote:

... 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.

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Stepurhan
By stepurhan
13th May 2015 12:45

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.

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