LOANS PAYABLE: Interest Accrual, Amortization Schedules, Covenants
- Graziano Stefanelli
- May 29
- 2 min read
Loans payable represent amounts borrowed by a company that must be repaid over time, usually with interest.
These are recorded as liabilities and managed through scheduled repayments, interest accruals, and compliance with loan covenants.
1. What Are Loans Payable?
Loans payable are financial obligations a business owes to banks, financial institutions, or lenders under formal borrowing agreements.
They include:
Principal owed
Interest to be paid
Any loan origination fees
Short-term or long-term classification
2. Initial Recognition
When loan proceeds are received:
debit Cash
credit Loans Payable (liability)
Example:
On March 1, a company borrows $100,000:
debit Cash ........................................................ 100,000
credit Loans Payable ........................................ 100,000
If loan origination fees or issue costs are material, they are typically amortized over the loan term under the effective interest method.
3. Interest Accrual
Interest is recognized over time, even if not yet paid.
Accrual entry (monthly):
debit Interest Expense
credit Interest Payable
Example:
Monthly interest on a $100,000 loan at 6% annual rate:Interest = ($100,000 × 6%) ÷ 12 = $500
debit Interest Expense .................................. 500
credit Interest Payable ................................... 500
4. Loan Repayment and Amortization Schedules
Loan repayments usually cover both principal and interest. Payment schedules can be:
Fixed principal + declining interest
Equal total payments (loan amortization)
Example payment breakdown (monthly):
Total payment = $2,000
Interest = $500
Principal = $1,500
Entry:
debit Interest Payable ................................. 500
debit Loans Payable ..................................... 1,500
credit Cash ...................................................... 2,000
5. Loan Classification
Type | Classification |
Payable within 12 months | Current liability |
Payable after 12 months | Non-current liability |
Payable in installments | Split into current/non-current portions |
Example:
If a $120,000 loan is repaid over 3 years, $40,000 is classified as current, $80,000 as non-current.
6. Loan Covenants
Lenders may impose covenants requiring the borrower to:
Maintain certain financial ratios (e.g., debt-to-equity)
Avoid excessive new borrowing
Provide periodic financial reports
Violation may result in:
Reclassification to current liability
Loan acceleration
Penalties or renegotiation
7. Disclosures
Required financial statement disclosures include:
Loan terms and maturity
Interest rates and collateral
Repayment schedules
Covenant compliance
Any defaults or restructuring
Key take-aways
Loans payable are recorded at borrowed amount and repaid over time with interest.
Interest is accrued regularly, even if not yet paid.
Repayments reduce both interest payable and principal.
Disclosures help users understand financing risk, covenant terms, and maturity schedules.
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