Expenses & income · Level: Basics
Journal entry: Paying loan interest
Interest is the price of borrowing and therefore an expense; it does not reduce the loan.
Worked example
The bank charges £570.00 of loan interest to our account.
Correct journal entry
Interest expense £570.00 / Bank £570.00
Debit
Interest expense£570.00
Credit
Bank£570.00
Why?
- Interest expense: expense incurred → debit
- Bank: asset decreases → credit
Typical mistake
Debiting interest to the loan account.
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 charges £480.00 of loan interest to our account.
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 paying loan interest?
Example: Interest expense £570.00 / Bank £570.00.
How do I recognise this case?
Interest is the price of borrowing and therefore an expense; it does not reduce the loan.
What is the typical mistake?
Debiting interest to the loan account.