Outstanding interest

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Anil (Querist)
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19 February 2019 Hi,

I Have taken long term from one of my friend with a certain rate of interest per year and I am planing to make the payment after 3 years. how could i make the journal entry for outstanding interest for Current year and how it balance in balance sheet.

Outstanding interest i can take liabilities side in Balance sheet but how it match to my assets.

Guest

Guest (Expert)

19 February 2019 Journal entry would be:

Interest on loan Dr.
To Outstanding interest payable

Yes, this will be shown in liabilities side. Corresponding assets will be your loan money and interest is reduced from capital account. Hence, the balance sheet will be tallied.

Anil

Anil (Querist)
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19 February 2019 As you said is i have to reduce Outstanding interest from My Capital ac instead of Assets Side. Is am Right... Thank You

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Guest

Guest (Expert)

21 February 2019 Why you think you need to reduce it from assets if you're not paying it now?

Anil

Anil (Querist)
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21 February 2019 Hi, '

with the Outstanding interest my liabilities gone up, how could i balance my assets in the balance sheet .

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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09 August 2024 When accounting for outstanding interest on a long-term loan from a friend, you'll need to ensure that your financial statements accurately reflect the liabilities and any corresponding impacts on the balance sheet. Here’s a step-by-step guide on how to handle the journal entries and balance the accounts:

### Journal Entries for Outstanding Interest

1. **Recording Interest Accrual:**
- At the end of each accounting period, you need to record the interest expense accrued, even if you haven’t paid it yet. This ensures that your financial statements reflect the true cost of borrowing.

**Journal Entry:**
```
Interest Expense (Profit & Loss Account) XXX
Outstanding Interest (Liabilities) XXX
```

- **Interest Expense:** This account reflects the cost of borrowing for the period.
- **Outstanding Interest:** This is a liability account that shows the interest that is due but not yet paid.

2. **Payment of Interest:**
- When you eventually make the payment for the interest, you will need to clear the outstanding interest liability.

**Journal Entry upon Payment:**
```
Outstanding Interest (Liabilities) XXX
Bank/Cash XXX
```

### Impact on the Balance Sheet

1. **Liabilities Side:**
- **Outstanding Interest:** This will appear on the liabilities side of the balance sheet. It represents the amount of interest that is due but has not yet been paid.

2. **Assets Side:**
- **Impact on Assets:** The outstanding interest itself does not directly impact the asset side of the balance sheet. However, the interest expense will affect your profit and loss account, which in turn affects your retained earnings (part of equity on the balance sheet).

### Equity and Capital Impact

1. **Capital Account:**
- If the loan was from a friend and was treated as a part of personal or owner's capital, then the outstanding interest would not directly reduce the capital but would instead show up as a liability.

- **Capital Account:** You would not adjust the capital account for the outstanding interest; rather, the impact would be reflected in the interest expense and the liabilities.

2. **Balancing the Balance Sheet:**
- The balance sheet must balance as follows:
- **Assets = Liabilities + Equity**
- As you accrue interest, your liabilities (outstanding interest) increase. The impact of the interest expense will be seen in your profit and loss statement, which affects retained earnings in the equity section.

### Summary

- **Accrued Interest:** Record interest expense and outstanding interest as liabilities.
- **Balance Sheet:** Outstanding interest appears under liabilities, while the effect on the income statement (interest expense) impacts retained earnings in the equity section.
- **Equity Impact:** You do not directly reduce capital for outstanding interest but consider its impact on net income and retained earnings.

By following these steps, you ensure that your financial statements reflect the correct amount of interest accrued and maintain a balanced balance sheet. If you’re unsure about specific accounting treatments or have unique circumstances, consulting with a professional accountant or financial advisor is recommended.