A business firm need funds for the purpose of working capital or to acquire some fixed assets or to repay some existing loans etc. These loans are given by banks or other financial institutions or by private persons etc. and they charge interest on loan given to the business firm. When the interest is paid to banks then bank interest account will be debited and if the interest is paid to other than banks in that case interest paid on other loans account will be debited.
The interest can be paid either in cash or by cheques. Suppose the business firm does not pay the interest amount due to any reason in that case the account of the lender is credited with the amount of interest.
Treatment of Interest Paid on Other Loans in Final Accounts
The interest paid on other loans is indirect expenses. Therefore, this expense is shown in expenses side of profit and loss account. Unpaid interest on loans is added in interest paid on other loans account. The amount of unpaid interest is either is added to personal account of lender or is shown separately in balance sheet in liabilities side as interest payable or outstanding expenses account or expenses payable account.
The Accounting Treatment of Interest Paid on Other Loans Account
a) In case of payment in cash or by cheques:-
Entry to be made
Debit:- Interest Paid on Other Loans Account
Credit:- Cash Account or Bank Account
b) In case of unpaid interest:-
Type of voucher to be prepared:- Journal Voucher
Entry to be made
Debit:- Interest on Other Loans Account
Credit:- Interest Payable Account
Expenses Payable Account
Outstanding Expenses Account
Personal Account of Lender
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