FINANCIAL ACCOUNTING

Session 6 – Loan repayments

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THEORY

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CONDITIONS OF THE REPAYMENT

Repayment of the principal part depends on the loan agreement:

o repayment of the entire amount (capital) at maturity,
Bullet payment: the capital is repaid only at maturity.

o constant repayments of the principal (or straight-line method)

The same part the capital is reimbursed at each
installment.
o repayment in flat payment: all cash payments-annuities
(principal part + interest) are the same
The same amount is paid at each maturity, including a
variable part of the capital and a variable interest on
the outstanding capital at the beginning of the period

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REPAYMENT OF THE LOAN – LOAN INSTALLMENTS
On the due date (every month, quarter, semester or year), the company reimburses a portion of the principal
(money borrowed) and pays the interest on the capital remaining due before the installment.

Cash payment = Loan repayment + interest.

Date Accounts Debit Credit Interests are an expense for the

company
Interest expense X
Loans payable (<1 year) X
Repayment of the loan decreases the
Cash at bank X outstanding capital
Loan agreement, bank statement

Decrease of the cash at bank balance

Documents which are reference for the transaction = interest + repayment

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CALCULATION
Loan interest = principal at beginning of the period x
corresponding interest rate
Principal at beginning of the period = capital remaining
due = amount borrowed – loan repayments from the
beginning (without interest)
 For a loan of length strictly less than one year:
monthly rate = annual interest rate /12
 For a loan of one year or more than one year:
equivalent monthly rate = (1+ annual rate)^(1/12)
-1
 Note: If the term is less than one month, the number
of days is prorated on the basis of a year of 360 days

Straight-line method :

Loan repayment = borrowed amount / number of

installments

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IMPACTS ON FINANCIAL STATEMENTS

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 INCOME
STATEMENT
Interest expenses are classified
in "financial income and
expenses" and have a negative
impact on the net profit during
its duration of use.
Sales (1)
Year Y
Cost of goods sold (2)
Gross profit (3)= (1)-(2)
Operating costs / expenses: (4)
Distribution costs
Administrative costs
Other operating costs
Operating profit (5) = (3) – (4)
Financial income and expenses: (6)
Interest income
Interest expense (-) - Interest paid on the loan
Income on ordinary activities before
taxes (7) = (5) + 6)
Income tax on ordinary activities
Net profit on ordinary activities
Nonrecurring items (gains & losses)
Income tax on extraordinary items
Net profit 7
 31/12/Y

BALANCE SHEET Fixed assets (1)

Intangible assets
Property, plant, and equipment
(Less accumulated depreciation)
Investments
Current assets (2)
Inventory
Decrease of cash at
Trade receivables
bank (total amount of
the installement) Prepayments
Other receveivables
Cash at bank and in hand -(interest paid + capital repaid)
Creditors: amounts falling due within one year (3)
Trade payables

Decrease of liability payroll liabilities

Loans payable - Capital repaid
towards the bank
Other current liabilities
Creditors: amounts falling due after one year (4)
Long-term loans
Other long-term debts
Net assets (1+2-3-4)
Capital and reserves
Share capital
Decrease of net profit Share premium
(interest expense) Retained earnings
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Other reserves
EXAMPLE

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EXAMPLE
Loan duration: 1 year
Loan start date : January 1st
Borrowed amount : £12,000
Straight-line method
Annual interest rate : 4%
Banking year = 365 days
Repaid every month

Equivalent monthly rate = (1+4%)^(1/12)-1 = 0.33%

Monthly loan repayment = 12,000 /12 = £1,000
Capital remaining due on February 1st = 12,000 – 1,000 = £11,000

January interest = 12,000 x0.33%= £39.6

February interest = 11,000 x 0.33%= £36.3

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Thanks for your attention.

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