I have loan in which the payment for the year is 122,158.33- 90,216.99 principal, 31,941.34
Now my question is when im creating my financial statement does my current liabilities only include the principal or the principal plus interest (90,216.99 or 122,158.33). I've heard people tell me different things.
Your interest payments should go to interest expense, an income statement account. It is an expense which does not go on the Balance Sheet.
The Balance Sheet shows liabilities that are either current (those amounts due within a year) or long-term. So your principal payments would reduce your liability. For example if your loan is 100000 and you made principal payments of 25000, your liability would be 75000. Any interest you paid in conjunction with the loan would go to interest expense. The Balance Sheet reflects the remaining balance of the loan (liability account). Your principle payments reduce that balance. The asset on the Balance Sheet would reflect the price paid and the remaining difference is equity. Assets=Liability+Equity.
I hope I didn't confuse you, just trying to help. Good luck!
sheldel is spot on..in the event you wanted a "second"
I have a public bond debt in the data file for one of my public utility clients.
We have to accrue the interest expense monthly, so this is posted to Expense and Liability, because the payments are only made twice a year.
So, yes, this issue can be answered both ways. It depends on defining "current liability" for this business.
And, it depends on the organization's accounting needs. You might need to track the Interest expense by posting as expense in a timely fashion, but accruing this as a liability to be paid in the future.
We make the debt service payment once a year in december. We generally define any current liability as a garunteed expense in the next 12 months. I dont know if that helps
abteachmt is right, if you are responsible for interim financial statements, accruing the interest would more accurately reflect the condition of the company. I noticed your nonprofit tag, so you may need to present financial statements quarterly. Accrued interest is a liability which would show as a current liability on the Balance Sheet. By posting interest expense when the payment is actually made, the accrued interest liability (which is compounded I will assume monthly?) would not show up on the B/S.
But getting back to the original question, if the interest expense is only posted once a year when the payment is made in December and that is your year-end, the interest expense belongs on the I/S, not the B/S.
we only need to produce a financial statement at the end of our fiscal year (which coincides with the end of the calander year). Interest compounds anually.
To accrue and pay accordingly:
In QB, set up a journal entry that is a Credit to Interest Other Current Liability and Debit to Interest Expense. Put in the monthly amount. Memorize this transaction and set it up to come up automatically and monthly, set the date. Then Clear it if you aren't creating this one, now.
You can read about Memorized transactions in the Help system.
Each monthly P&L report will show the increased interest expense. Each monthly B/S report will show the interest liability increasing, too.
When you make the payment, post the interest portion from the Interest liability account. This should clear the liability, so you can start fresh again.
I also would make one entry for the Current Principal, from Long Term Liability to Short Term Liability account for the principal due in the next year.
Now the main debt account is the Long Term portion and the new account is the Current portion.
When you make the payment, this principal split is paid against the Current account, not the long term account.
"We make the debt service payment once a year in december. We generally define any current liability as a garunteed expense in the next 12 months. I dont know if that helps"
I would make a year end entry to accrue the upcoming interest as both expense and liability, then. Also accrue the upcoming principal as current. Then pay from the liabilities accounts.
This meets your definition.
