Loans & drawings · Level: Exam
Journal entry: Loan instalment with repayment and interest
An instalment usually contains both: the repayment reduces the loan, the interest is an expense.
Worked example
The bank debits the loan instalment of £4,910.00: £4,500.00 repayment and £410.00 interest.
Correct journal entry
Bank loan £4,500.00, Interest expense £410.00 / Bank £4,910.00
Debit
Bank loan£4,500.00
Interest expense£410.00
Credit
Bank£4,910.00
Why?
- Bank loan: liability decreases → debit
- Interest expense: expense incurred → debit
- Bank: asset decreases → credit
Calculation
- The repayment reduces the debt; only the interest is an expense.
Typical mistake
Booking the whole instalment to the loan or to interest.
Your turn
Three problems on exactly this case, with different numbers. Amounts work with or without separators, e.g. 2,400.00 or 2400.
Transaction
The bank debits the loan instalment of £5,660.00: £5,500.00 repayment and £160.00 interest.
Debit
Assets up · expenses · liabilities down
Total debit£0.00
Credit
Liabilities up · income · assets down
Total credit£0.00
Frequently asked questions
What is the journal entry for loan instalment with repayment and interest?
Example: Bank loan £4,500.00, Interest expense £410.00 / Bank £4,910.00.
How do I recognise this case?
An instalment usually contains both: the repayment reduces the loan, the interest is an expense.
What is the typical mistake?
Booking the whole instalment to the loan or to interest.