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Interest on Loan

Interest must be paid on loans whether there is profit or loss. It is calculated by referring to the rate of interest agreed to be paid by the firm and the amount and period of the loan. Suppose, a loan of Rs. 2000 is taken on 1st May 2007 at 18%. If the accounts are closed on 31st December, the interest for the year will be Rs. 240. ie., Rs. 2000*18/100*8/12. The interest amount, if not paid in cash, may be credited either to the personal account of the lender or to the Interest Outstanding Account. The debit, of course, will be to the Interest Account. The adjusting entry is:


Interest A/c Dr. Rs. 240
To Interest Outstanding A/c Rs. 240
(or the lender's personal A/c)

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