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Loan taken entry

Bhavesh (Accounts) (163 Points)

21 October 2024

How should pass an entry for taking a home loan entry in books for eg.: home loan taken of 50 lakhs with 9% rate of interest. how to bifurcate the principal and interest.

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Rama chary Rachakonda (Master in Accounts & high court Advocate email ID:ramachary64@gmail.com voice no:9989324294) (7589 Points)
Replied 21 October 2024

To pass an entry for a home loan in your books, you'll need to bifurcate the principal and interest components.

Here's a step-by-step guide:

1. Create a liability account: "Home Loan" (Liability)

2. Create an expense account: "Interest Expense" (Expense)

3. Create an asset account: "Property" (Asset) Entry for loan taken: Debit: Property (Asset) = ₹50,00,000 Credit: Home Loan (Liability) = ₹50,00,000 Entry for interest paid: Debit: Interest Expense (Expense) = ₹4,50,000 (9% of ₹50,00,000 for 1 year) Credit: Home Loan (Liability) = ₹4,50,000

This will bifurcate the principal and interest components.

The interest expense will be recognized in the Profit & Loss account, and the principal amount will be reduced from the Home Loan liability account.

For each installment paid, you'll need to split the payment into principal and interest components based on the loan amortization schedule.

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