Can somebody advice me why Repayment amount of a term loan is not considered as an expense in a Company's P&L stmt while the interest for the same is considered ??
Can somebody advice me why Repayment amount of a term loan is not considered as an expense in a Company's P&L stmt while the interest for the same is considered ??
What is an expense?
In simple words, an expense is a payment for goods purchased or services received. e.g - You go and buy grocery - it is an expense for the household. You go to a barber for haircut and pay for it - it is an expense.
What is a loan?
Let us say you need some money and ask the same from your friend for a week's time. Your friend gives you Rs. 100/- for one week but on condition that you need to pay him back Rs. 105/- after a week.
After a week, you pay him back Rs.105/- which includes Rs. 100 (borrowed by you - loan taken by you) and Rs. 5 extra. This extra component is nothing but the interest your friend has charged for lending you money and bearing the risk of default (In case you did not pay him back).
The 5 rupees is the cost of loan (service) which is expense for you.
Rs. 100 which you repaid is not an expense (you are just giving back what you have taken earlier).
Similarly, repayment of term loan is not an expense and is not treated as expense whereas interest is.
Hope it is clear.
only Income and expenditure derived from business will be shown in the profit and loss account.....Interest paid on term loan is an expense so it forms part of profit and loss ac....
where as, with regard to term loan when the loan is taken liability will be created...when the loan is paid it is against the liability not an expense so it doesnt forms part of p & l account...
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