Interest on Loan

AS 1873 views 3 replies

Prakash

39 Points Joined July 2008

Dear there,

Could any one let me know the correct accounting treatment for Interest on Loan?

Ex:M/s X is a proprietorship concern. Availed a Term loan for Rs.4,00,000 on 30^th of march.. At the end of 7 years, It would have paid Rs. 5,50,000 with interest ( as per repayment schedule).

The Balance Sheet of the Concern showing Rs.5,50,000 as term loan payable to the bank. In the Assets side Rs. 1,50,000 disclosed as Prepaid Interest. At the end of every year, the accountant will transfer the interest paid by writing off the Prepaid Interest.

My questions

i. how a concern show Interest which is pertaining to future period as liability.

ii. The banker shows Rs. 4,00,000 as receivable from M/s X. then how can the bank statement and the book balance get allied?

iii. What will it do in case of pre closure?

Is there any accounting Standard which is prescribing this?

I think its not necessary to show the Interest as liability unless it is unpaid during the previous year(s). We have to show Rs.4,00,000 as loan. When ever the Concern pays the installment, it must be reduced in accordance with the repayment schedule and the balance amount will get debited in Interest on Loan A/c.

Pls let me know ASAP.

Regards,

Durai.Prakash

Replies (3)

RITESH KOTHARI

B.COM FCA DISA(ICAI)

778 Points Joined March 2009

1. THE TERM LOAN SHOULD BE SHOWN AT RS.400000/- ONLY IN BALANCE SHEET.THERE IS NO PREPAID INTEREST IN THIS CASE.AS AND WHEN THE INSTALLMENT IS DUE AND PAID THE AMOUNT OF PRINCIPAL WILL BE DEBITED TO TERM LOAN A/C AND THE INTEREST PORTION IS RECOGNISED IN P&L ACCOUNT AS EXPENSE.

2. IN CASE OF PRE CLOSURE THE AMOUNT OF LOAN OUTSTANDING WOULD BE SAME AS THE TERM LOAN A/C IN BALANCE SHEET.WHEN THE PRE-PAYMENT IS MADE P&L A/C WOULD NOT COME IN FOREGROUND AND THE WHOLE OF PAYMENT IS DEBITED TO TERM LOAN A/C

Prakash

39 Points Joined July 2008

Dear Mr.Ritesh,

Thank you for the reply. Me too have the same stand, But In my office all my seniors, even the Chartered Accountant also saying that there is nothing wrong to show the whole amount as liability.

Could you pls let me know if there is any case law or any examples ?

With thanks,

Durai.Prakash