How do you record a loan repayment that includes both principal and interest components?

How do you record a loan repayment that includes both principal and interest components?

• A. Debit Interest Expense for principal portion; Debit Notes Payable for interest portion; Credit Cash for total payment.
• B. Debit Notes Payable for the principal portion; Debit Interest Expense for the interest portion; Credit Cash for total payment.
• C. Debit Cash for the principal; Credit Notes Payable for interest.
• D. Debit Notes Payable for total payment; Credit Cash for principal.

Answer: (B)

When recording a loan payment that includes both principal and interest, the key is to separate the effects on the accounts: the principal portion reduces the liability, and the interest portion records the cost of borrowing as an expense. The correct entry debits Notes Payable for the principal portion to decrease the loan balance, debits Interest Expense for the interest portion to reflect the cost of borrowing, and credits Cash for the total amount paid. For example, if you pay 1,000 of principal and 120 of interest, you would debit Notes Payable 1,000 and Debit Interest Expense 120, and credit Cash 1,120. This approach properly matches the liability reduction with the principal and records the interest in the period it is incurred. The other options misallocate either the principal or the interest, or misstate the effect on cash and the liability.

When recording a loan payment that includes both principal and interest, the key is to separate the effects on the accounts: the principal portion reduces the liability, and the interest portion records the cost of borrowing as an expense. The correct entry debits Notes Payable for the principal portion to decrease the loan balance, debits Interest Expense for the interest portion to reflect the cost of borrowing, and credits Cash for the total amount paid. For example, if you pay 1,000 of principal and 120 of interest, you would debit Notes Payable 1,000 and Debit Interest Expense 120, and credit Cash 1,120. This approach properly matches the liability reduction with the principal and records the interest in the period it is incurred. The other options misallocate either the principal or the interest, or misstate the effect on cash and the liability.