Home For accounting professionals General accounting discussion
Current updates regarding coronavirus (Covid-19) and the precautions AAT are taking will be continually updated on the below page.

Please check this link for the latest updates:
We hope you are all safe and well and if you need us we will be here. 💚

Calculating the interest part of a loan?

KanatkinsKanatkins New MemberRegistered Posts: 11

Have been stuggling with calculating what part of a business loan to but to interest as expenses - can anyone help.

Is the a formula to use?



  • T.C.T.C. Experienced Mentor Registered, Tutor Posts: 1,448
    Ideally you need the original loan document, which will give all the details you need, including the interest rate and the amount of interest.
  • WrenchieWrenchie Feels At Home Registered Posts: 33
    It depends on what sort of loan it is.

    Some banks provide monthly/yearly statements with the interest shown as payments. These are quite straightforward.

    Others just have the original loan document with the interest rate, monthly payments etc. These are a bit more difficult. The interest is applied to the outstanding loan. I usually set up a spreadsheet showing the outstanding loan each month, the amount of the repayment, the amount of interest applied and the loan outstanding at the end of the month.

    It is a bit fiddly so I'm hoping someone will reply with an easier answer for us both!
  • burgburg Experienced Mentor GloucesterModerator, FMAAT, AAT Licensed Accountant Posts: 1,441
    Depends on the type of loan. If it is a variable rate loan then there should be a statement. If it is a fixed rate loan then I do the following:-

    Using the loan agreement take the total amount of interest payable. (this can be calculated by taking the payment amount x the number of payments less the original loan amount)
    Assume the interest accrues evenly.
    Then if three payments are made in the year and there are a total of 60 payments to be made the interest for that year will be 3/60 of the interest.

    I then use a control account to calculate the amount outstanding at the year end and reconcile this to the outstanding payments and remaining interest to be accrued which should come back to nil.

  • KanatkinsKanatkins New Member Registered Posts: 11
    Thankyou -doesn't seem to be an easier option then!

    Is it common practice to assume the interest accrues evenly, I would presume the interest reduced year on year?

    Best Regards
  • Gem7321Gem7321 Experienced Mentor DevonMAAT, AAT Licensed Accountant Posts: 1,438
    Kanatkins wrote: »
    Is it common practice to assume the interest accrues evenly, I would presume the interest reduced year on year?

    I agree with Ian, that's what I've always done if I have nothing else to go by. Same for HP.
  • deanshepherddeanshepherd Font Of All Knowledge Registered Posts: 1,809
    Google 'sum of the digits'.

    That is the most common method of weighting the interest over the period of the loan.
  • Jon1Jon1 New Member Registered Posts: 11
    Is sum of digits not a GAAP/FRS requirement?

    Anyway, sum of digits calc reflects the true nature of the loan i.e more interest is paid at the start of the loan, because more capital is outstanding.
  • deanshepherddeanshepherd Font Of All Knowledge Registered Posts: 1,809
    Sum of the digits is one of a number of acceptable methods and, yes, the interest is weighted towards the beginning.
  • KanatkinsKanatkins New Member Registered Posts: 11
    checked it out on HMRC

    sum of digits much easier than spreadsheet I was using -Wrenchie you should have a look at this, might save you some time too!
Sign In or Register to comment.