A business can take any amount of money as a loan from a bank or outsiders. In return, the business has to pay amount as interest.
A. Loan is taken from a bank or person:
Journal Entry:
Example: ₹10,000 was taken as a loan from the bank.
Solution:
B. Interest charged by the bank or person and then paid:
There can be a situation where the interest is charged first and then paid. There will be two Journal Entries in this case.
i. Journal Entry: (On charging of interest)
Example: Bank charged interest of ₹500 on loan taken.
Solution:
ii. Journal Entry: (On payment of interest)
Example: Interest due ₹500 on loan taken is paid.
Solution:
Or
C. Interest paid to bank/person on the loan:
In this case, only a single entry is passed because interest is directly paid.
Journal Entry:
Example: Interest of ₹500 has been paid to the bank on the loan taken.
Solution:
