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missymarykay55
Level 3

Accounting question

Ok I have an investor who invested in our company 25,000.00.  We have not paid the investor back yet he gave us the money in 2016.  We have to put the interest into our books to show what we owe him as of Jan 31,2021.  His note is set up as a long term liability for 25,000.00.  My question is where do I add the interest that he has accrued?  I need to do a journal entry for this interest but I don't know what to debit or credit can someone help me out with this?  Starting in Feb we are going to start paying him monthly the interest that he accrues so this JE that I do will show what is owed him in back interest plus the 25,000.00 which is the original note on the long term liabilities.  Any help is greatly appreciated.  My email is [email address removed]

 

Cheryl

Solved
Best answer February 03, 2021

Best Answers
john-pero
Community Champion

Accounting question

Create a vendor Bill, not a journal entry. It is the  easiest way to add something you owe. Tge principslbof the loan is or should already be listed as a liability at tge time you received and deposited the money.

 

For interest You are adding an additional expense to be paid. If you do not have Interest Expense or similar in your chart of accounts add it now. Enter one bill for the total interest due to date or enter one bill at end of each year you have had this money. Keep in mind that even with simple interest, an annual interest rate is prorated for tge months within any short year.  Example, you borrow on 4/1 of a year at 6%. On 12/31 you do not owe 6% but only 4.5% (6/12*9)

 

The bill(s) for interest expense add all the additional money you owe. Unless there is an amortization schedule,  as you start to pay back you will pay only against the interest until past due interest is zero at which time you would start paying down principal. Once principal starts to diminish your annual new interest added each 22/31 will be less.

 

If you instead insist on a journal entry....Debit Interest Expense and Credit Accounts Payable (this is exactly what a bill does but a bill allows you to track the debt by name, which a JE does not)

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5 Comments
john-pero
Community Champion

Accounting question

You need to review the documentation and maybe have a discussion with the investor/lender. Is interest compounded so that it is interest upon interest and how often? Example 25000 at 10% after one year is 27500 and if compounded interest in year 2 is 2750 =30250 and interest in year 3 is then 3025.  The lender might want it this way since you never paid any interest at all for last 5 years. 

 

Now since you never accounted for interest in past tax years (although if cash basis only your balance sheet would be affected by past dated entries) the easiest way to post thdvinteredt due is with vendor billing for interest expense. The interest adds up as billed and unpaid and you pay portions of interest and maybe principal during payback

missymarykay55
Level 3

Accounting question

so your saying to add the interest to the interest expense but if I debit the expense what am I crediting?  I did not understand your answer.

missymarykay55
Level 3

Accounting question

The interest is simple interest not compounded. I need to make one JE for the interest and I need to know what to debit and what to credit.

john-pero
Community Champion

Accounting question

Create a vendor Bill, not a journal entry. It is the  easiest way to add something you owe. Tge principslbof the loan is or should already be listed as a liability at tge time you received and deposited the money.

 

For interest You are adding an additional expense to be paid. If you do not have Interest Expense or similar in your chart of accounts add it now. Enter one bill for the total interest due to date or enter one bill at end of each year you have had this money. Keep in mind that even with simple interest, an annual interest rate is prorated for tge months within any short year.  Example, you borrow on 4/1 of a year at 6%. On 12/31 you do not owe 6% but only 4.5% (6/12*9)

 

The bill(s) for interest expense add all the additional money you owe. Unless there is an amortization schedule,  as you start to pay back you will pay only against the interest until past due interest is zero at which time you would start paying down principal. Once principal starts to diminish your annual new interest added each 22/31 will be less.

 

If you instead insist on a journal entry....Debit Interest Expense and Credit Accounts Payable (this is exactly what a bill does but a bill allows you to track the debt by name, which a JE does not)

View solution in original post

missymarykay55
Level 3

Accounting question

Thank you that makes perfect sense.  I appreciate the help.

Cheryl

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