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 30th 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
CAclubindia
