16 March 2013
Cost of Acquisition 137,000 Less: 20% Downpayment 27,400 Loan Received in Bank Acc 109600 Interest Payable on Loan Receipt for the period of 36 Months - 14738.25 ( as per Repayment Schedule on Reducing Balance Method) Amortization Schedule for 1st Year Date
Openig Balance Interest Principal Total Instalment Closing Balance 5-
16 March 2013
Your first accounting entry needs to be modified as follows:
1. Asset Account Dr. 137,000 To Bank Account 27,400 To Loan Account 109,600
2. For EMI payments: Loan Account Dr. (Amount of principal) Interest on loan Account Dr. (Interest Amt) To Bank Account (EMI amount)
You need not pass entry for total interest (Rs.14,738.25) at the beginning itself. It will be booked along with the EMI entry as displayed in (2) above.
The reason being the interest does not accrue at the beginning itself. It gets accrued over the period of the loan. Hence, the entire interest should not be booked at the beginning.
16 March 2013
The accrued interest Rs.542 would be the interest for the period 5-Dec-12 to 31-12-12 since the balance confirmation would be as on 31-Dec-12. You can also calcualte the same as the interest amount displayed in the next EMI divided by 31 days and multiplied by 26 days od Dec 2012.
16 March 2013
Thanks a ton Vivek,1st time Got a clear answer from CA Club.
One more querry I have seen somewere interest for the full 36 month is shown as Prepaid then reversed. which one is better method prepaid interest or monthly expense out method as u said.
17 March 2013
The question of prepaid interest does not arise since you have not paid anything. The schedule of repayment is provided by the bank as a document displaying how your EMI would be adjusted between interest and principal repayment over the period of the loan.
The justification for recognising interest on a monthly basis is provided in my first reply.
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