Prudence concept and Bank loan Interest for terms more than 1 year

[Jihan]

I am confused about a journal entry that may seem silly to most. A company takes 1 million bank loan for 3 years, at 9% interest. To me According to the prudence concept, the entire amount due on interest for the 3 years is meant to be recognised in long-term accrued, and portioned to the current year accrued; it seems that this is not the general practice!
Can anyone suggest the journal entries for this?

 

[kirby]

You only accrue the interest payable as it becomes due. The notes to the financial statements would disclose the loan terms.

 

[Fidget]

I am confused about a journal entry that may seem silly to most. A company takes 1 million bank loan for 3 years, at 9% interest. To me According to the prudence concept, the entire amount due on interest for the 3 years is meant to be recognised in long-term accrued, and portioned to the current year accrued; it seems that this is not the general practice!
Can anyone suggest the journal entries for this?

Interest payable on a loan is just part of business as usual and, as noted in Kirby's comment above, is accounted for as it falls due, with the finer detail forming part of the notes to the accounts.

I think you might be misinterpreting the prudence concept. The prudence concept is more around accepting a loss as soon as it's noticed that it has or seems likely to happen - so things like impairments, bad debt/expected credit losses, even if there's a chance that losses can be recouped (or reversed in the case of impairments). The flip side of it being that you don't record income until it's virtually certain that you will receive it. The prudence concept is quite outdated now as a concept in its own right because it's embedded into all accounting standards.

 

[Jihan]

Thank you both.
It would be helpful if someone can share the relevant journal entries best practice regime for an Installment based loan of say 1 million at 3 percent interest for 3 or 5 years. Including how the interest accrual is treated.
Thank you

 

[hamza.el]

Here are the bookkeeping records for an instalment loan with interest over 3 years :

When the contract is signed :
Debit: Loans receivable
Credit: Cash
At each loan disbursement :
Debit: Cash
Credit: Loans receivable
With every interest payment :
Debit: Interest expense
Credit: Cash
At the end of term :
Debit: Loans receivable
Credit: Cash

 

[Fidget]

Thank you both.
It would be helpful if someone can share the relevant journal entries best practice regime for an Installment based loan of say 1 million at 3 percent interest for 3 or 5 years. Including how the interest accrual is treated.
Thank you

Maybe this will help to illustrate. It's based on simple interest over 3 years and paid annually in arrears. Accounting entries for year 1 only. The second two entries would be the same for years 2 & 3, with the first entry only being needed in year 1. In terms of interest accrual, you'd accrue that in the same way as any other expense if it was due but hadn't been paid at the time your accounts are produced.

 

[hamza.el]

Maybe this will help to illustrate. It's based on simple interest over 3 years and paid annually in arrears. Accounting entries for year 1 only. The second two entries would be the same for years 2 & 3, with the first entry only being needed in year 1. In terms of interest accrual, you'd accrue that in the same way as any other expense if it was due but hadn't been paid at the time your accounts are produced.

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Really appreciate your feedback , concisely and precisely explained .