Loan Accounting 101: Accrual, Amortization and Interest

Money coming in and out of your bank account is the easiest thing to track, but honestly, it’s not the best guide for your books. A borrower pays ₱10,000 today. Some of that’s income you earned, and some is just your money returning. Loan accounting has to split those apart every time, for every loan.

The main rule that saves you from most loan accounting mistakes is this: cash movement isn’t the same as income, expense, or principal movement. Journal entries need to separate all three before anything hits your financial reports. If you skip this, your income statement gets bloated, your loan balance drifts off, and your month-end close turns into a wild goose chase.

This guide follows a loan’s journey in your records: origination, interest accrual, repayment splitting, amortization, period-end reconciliation, and what it all looks like on your statements. You’ll see both sides, since most small lenders are also borrowers. You lend to clients, but you might owe a bank or funder too, and those get recorded in opposite directions.

If you’re juggling a loan book in a spreadsheet and your books somewhere else, maybe it’s time to see what happens when you link them. Lendbox offers a 30-day free trial at lendbox.io, and the team will even import your Excel file for you. Not bad.

Start With the Loan’s Accounting Perspective

Before you write any journal entry, figure out which side of the loan you’re on. The same ₱500,000 loan is an asset in one set of books and a liability in another. The loan agreement spells out exactly what the numbers should be.

Lender Receivable Versus Borrower Payable

When you hand money to a borrower, you haven’t spent it. You just turned cash into a loan receivable, which sits as an asset. Your total assets don’t change at the moment you disburse.

If you borrow from a funder, the reverse happens. Cash lands in your bank and a liability appears—recorded as loan payable, notes payable, or maybe mortgage payable, depending on the deal.

• You lend: Record as Loan receivable (Asset)
• You borrow: Record as Loan payable / notes payable (Liability)
• You draw on a facility: Record as Line of credit payable (Liability)

Small lenders usually run both at once. Keep the two ledgers separate, or sooner or later, you’ll net one against the other by mistake.

What Happens When a Loan Is Originated

At origination, the entry is short. As lender, you debit the loan account for the principal and credit cash. Nothing hits your income statement yet, since you haven’t earned anything.

As borrower, you debit your bank account and credit loan payable for the same principal. Again, no income. Borrowed money isn’t revenue—ever.

How the Loan Agreement Sets the Record

The loan agreement is your gold standard. It sets the principal, interest rate, day count basis, payment dates, fees, and whether the rate can change.

Pull those terms into your loan account setup on day one. Every accrual and repayment split later on comes from them. Enter the wrong rate at the start, and you’ll quietly mess up months of interest.

Recognise Interest When It Is Earned or Incurred

Interest is earned as time passes, not when a payment arrives. The gap between when interest builds up and when money moves is where most period-end surprises pop up. An adjusting journal entry closes that gap.

Cash Accounting and Accrual Accounting

With cash accounting, you record interest when payment lands. It’s simple, but it makes a quiet month look bad and a month with three collections look fantastic.

With accrual accounting, you record interest in the period it’s earned or incurred, payment or not. For lenders with borrowers paying on different dates, accrual is the only way to get a fair monthly result.

The unpaid part sits on the balance sheet as accrued interest receivable if you’re the lender, or accrued interest payable if you owe it.

Calculating Accrued Interest

For simple interest, the formula’s straightforward:

Principal × annual interest rate × (days elapsed ÷ days in year)

Say it’s a ₱200,000 loan at 18% per year, 12 days in:

₱200,000 × 0.18 × (12 ÷ 365) = ₱1,183.56

Two details matter if you want your number to match the other party’s: first, the day count basis (365 or 360), and second, whether interest starts from the disbursement date or the next day. Both are in the loan agreement. Check them once, and stick to them.

Period-End Interest Adjustments

If your reporting period ends on the 31st but repayments fall on the 15th, you’ve got sixteen days of interest accrued that nobody’s paid yet.

As borrower, the adjusting journal entry looks like this:

• Debit: Interest expense — ₱2,400
• Credit: Interest payable — ₱2,400

As lender, the adjusting journal entry mirrors this:

• Debit: Interest receivable — ₱2,400
• Credit: Interest income — ₱2,400

When the payment comes in, clear the accrued balance first, then recognize only the interest earned since.

If you’ve got variable interest rates, double-check the rate notice before you accrue. Leaving a recurring entry untouched after a rate change is a classic reconciliation headache.

Split Every Repayment Between Principal and Interest

One payment leaves the borrower’s bank, but it covers two different things. Getting the split right every month keeps your loan balance in sync with the schedule and stops your expenses from being overstated.

The Standard Principal-and-Interest Payment Entry

Take a ₱25,000 monthly payment on a term loan where ₱20,000 is principal and ₱5,000 is interest. From the borrower’s side:

• Debit: Loan payable — ₱20,000
• Debit: Interest expense — ₱5,000
• Credit: Cash — ₱25,000

From the lender’s side:

• Debit: Cash — ₱25,000
• Credit: Loan receivable — ₱20,000
• Credit: Interest income — ₱5,000

If you accrued interest earlier, part of that ₱5,000 clears accrued interest instead of hitting income again. Skip this, and you’ll double-count interest.

Interest-Only Payments and Revolving Credit

A line of credit usually runs interest-only during the draw period. The entry is just: debit interest expense, credit cash. The liability balance doesn’t move.

When you pay down the facility, the entry mirrors a term loan. Keep the line of credit in its own general ledger account, since the balance changes with every draw and repayment—no fixed schedule here.

Why Principal Reduction Is Not an Expense

Principal repayment never touches the income statement. It just reduces cash and the liability, both on the balance sheet.

Booking the full ₱25,000 to a "loan expense" account is a classic mistake in small lending businesses. It overstates costs, understates what you still owe, and messes up your ability to reconcile with the lender’s statement.

Use the Amortization Schedule as the Source of Truth

The amortization schedule tells you, period by period, how much of each payment goes to interest and how much to principal reduction. Treat it as the control document your ledger must match, not just something you check when things look off.

How an Amortizing Balance Changes Over Time

Interest is charged on the outstanding balance, so early payments are interest-heavy and later ones are mostly principal. The payment amount stays the same, but the mix shifts over time.

Here’s a ₱500,000 loan at 12% over 24 months:

• Payment 1: Total ₱23,537 | Interest: ₱5,000 | Principal: ₱18,537 | Balance: ₱481,463
• Payment 12: Total ₱23,537 | Interest: ₱2,872 | Principal: ₱20,665 | Balance: ₱266,556
• Payment 24: Total ₱23,537 | Interest: ₱233 | Principal: ₱23,304 | Balance: ₱0

Borrowers rarely expect this. It’s worth explaining before the first repayment, not at month six when confusion sets in.

Fixed and Variable Rate Loans

A fixed rate means the schedule you set at the start holds for the full term. Build it once, and post against it.

Variable rates break that. Every rate change means you regenerate the remaining schedule, and either the payment amount or the term has to shift. Rebuild the schedule at the change date, keep the old version, and note which entries were posted under which rate.

Handling Fees, Discounts and the Effective Interest Rate

Loan origination fees aren’t income the day you collect them, and not an expense the day you pay them. With an effective interest approach, you spread them across the loan term, which bumps the effective interest rate above the stated rate.

Discounts work the same way. A fixed-amount discount or a lower rate changes the cash flows, so it changes the schedule. Recalculate, don’t just fudge the final payment to make things balance.

Reconcile Loan Records Before Closing the Period

Reconciliation is the step that catches errors entries alone can’t. You’re checking that three things match: the loan schedules, the money that actually moved through your bank account, and the general ledger.

Match Loan Schedules, Cash and the General Ledger

Run three comparisons every period. Total loan receivable per your loan schedules against the receivable control account. Cash received per the repayment register against bank deposits. Interest payable and accrued interest balances against a recalculation from scratch.

A quick worksheet helps:

• Opening loan balance per ledger
• Plus disbursements in the period
• Less principal collected
• Less write-offs
• Equals closing balance, which should match the sum of individual loan accounts

If those two numbers don’t match, the break is in the details, not the total. Time to dig in.

Investigate Timing Differences and Exceptions

Most differences come down to timing, not mistakes. Payments might land on the last day and clear the next, or mobile money may settle a day late. You might also see interest accrue through month-end even though the payment date falls mid-month.

List each difference with a date, an amount, and a one-line note explaining it. If something stays unexplained after two periods, it’s probably a real posting error—usually a repayment put on the wrong loan or split by hand instead of following the schedule.

Keep Evidence Ready for Review

Audit readiness is really just about keeping your files in order. For each period, hang onto the amortization schedules you used, any rate change notices, the accrual calculations, the bank statements, and a list of manual journal entries with a quick reason for each.

Connected systems really help here. When repayments go through a platform like Lendbox, the journal entry comes straight from loan activity, and the audit trail shows who changed what. So, the evidence is already there instead of you scrambling to pull it together later.

Read the Result in Your Financial Statements

All those entries above eventually show up in two places: a balance on the balance sheet and an amount on the income statement. Reading them right tells you if your loan book is actually earning, or just spinning cash in circles.

Balance Sheet Effects of Principal and Accrued Interest

Your loan receivable sits under assets, ideally split between current and non-current. Interest you've earned but haven't collected yet sits separately as accrued interest receivable, not mixed into principal.

On the liability side, split what you owe the same way. Principal due within twelve months sits in current liabilities; the rest goes under long-term. Keep interest payable on its own line too.

Income Statement Effects of Interest and Fees

Interest income is what you earned this period, not just what you collected. Interest expense is what your own borrowing cost you this period, again, regardless of when you paid it.

Fees follow the recognition pattern you picked at the start. Either recognize them upfront or spread them across the term—but do it consistently, and don’t mix them into interest.

The interest coverage ratio—earnings before interest and tax divided by interest expense—is the number funders usually want to see. It means something only if you’ve properly accrued the interest expense.

Reporting Frameworks

GAAP, US GAAP, and IFRS all require accrual recognition and separating principal from interest. They do differ on details like how to treat fees, impairment, and presentation though.

Which framework applies? That depends on your jurisdiction, your size, and who's reading your statements. Honestly, that's a chat for your accountant—not just a setting in your software.

Tax and Cash Flow Considerations

Most tax systems treat interest expense differently from principal repayment, and the rules can get pretty confusing depending on where you are. Local tax authorities—like the IRS in the U.S.—set their own standards, so you really have to check the details.

On a cash flow statement, interest paid shows up under operating activities. Meanwhile, principal payments land in financing. It’s the same payment, but it splits into two lines, each telling its own story.