How to Record a Business Loan Payment (Principal vs. Interest)

Your bank statement shows a $1,000 loan payment leaving your account. You record a $1,000 expense. A few months later your loan balance in the books doesn’t match the lender’s statement, and your profit looks lower than it should. Nothing is wrong with your math. The payment just isn’t one thing. It’s two.

This post shows you how to split a loan payment into its two parts, record each one in the right place, and check your work against the lender’s statement.

The Two Parts of Every Loan Payment

Each payment you make on a loan has two pieces:

• Principal is the part that pays back the money you borrowed. It shrinks what you owe.
• Interest is the fee the lender charges for letting you use their money. It’s a cost of doing business.

Early in a loan, most of each payment is interest. Later, most is principal. The total payment usually stays the same, but the split changes every month.

Why the Split Matters

When you borrowed the money, you didn’t earn income. You took on a debt. So when you repay principal, you aren’t spending money on the business either. You’re paying back what you owe. That’s why the two parts go in different places in your books:

• Interest is an expense. It goes on your income statement and lowers your profit.
• Principal is not an expense. It reduces a liability (a debt you owe) on your balance sheet.

If you record the whole payment as an expense, your profit looks too low and your loan balance never goes down. That’s the mismatch in the opening example.

The tax agencies treat interest as its own item. The Canada Revenue Agency (CRA) says you can deduct interest on money borrowed for business purposes, but you cannot deduct the principal part of loan or mortgage payments. In the US, the IRS Schedule C has a line for business interest (line 16b for interest that isn’t a mortgage reported on Form 1098) and no line for principal repayments.

Step 1: Record the Loan When You Receive It

Before any payment, the money coming in needs an entry. Say you borrow $10,000 and it lands in your business bank account:

• Debit (increase) Cash: $10,000
• Credit (increase) Loan Payable: $10,000

Notice there’s no income here. A loan is not revenue. Your cash went up and so did your debt. (Not sure what “debit” and “credit” mean? Our debits and credits cheat sheet walks through it.)

Step 2: Find the Split on Your Lender Statement

Your lender’s statement or online portal shows how each payment splits. Look for lines labeled “principal” and “interest.” If you have an amortization schedule (a table showing every payment’s split from start to finish), use that too.

Lenders round differently, so use their numbers, not your own calculation. Your books need to match theirs.

Step 3: Record Each Payment in Two Parts

Say your monthly payment is $1,000. This month the lender shows $800 principal and $200 interest:

• Debit Loan Payable: $800
• Debit Interest Expense: $200
• Credit Cash: $1,000

Cash goes down by the full $1,000, matching your bank. Only $200 hits your income statement. The other $800 shrinks the debt. Next month the split shifts a little — maybe $805 principal and $195 interest. Record it the same way with the new numbers.

Step 4: Check Your Work

Every month, compare your Loan Payable balance to the “remaining balance” on the lender’s statement. They should match. If they don’t, the usual causes are:

1. You recorded the full payment as an expense. Your balance never dropped.
2. You used the wrong split. Use the lender’s numbers.
3. A fee got mixed in. Late fees and origination fees are their own line, usually an expense, not part of principal.
4. A payment went through the wrong account. Check the bank feed against the loan account.

This check is also a good use of an AI second opinion: paste in the statement figures and your entry and ask whether the split looks right. Use it to confirm, not to replace the statement. (More in How to Use AI as a Second Opinion on Your Books.) And if your loan account is what’s throwing your cash off, see Why Your Bank Reconciliation Doesn’t Match.

What About Interest You Owe but Haven’t Paid Yet?

If you close your books mid-month and interest has built up but not been paid, an adjusting entry records that interest as an expense and a liability. That’s a month-end step, covered in Adjusting Entries Explained and Month-End Close, Explained.

US and Canada: What Changes

The bookkeeping is the same in both countries. What differs is where interest shows up on your tax form:

• US sole proprietors report business interest on Schedule C. Interest is sorted by what you used the loan money for, so a loan used for equipment and a loan used for personal spending are treated differently. Some larger businesses face a limit on deducting interest (Section 163(j)), but the IRS exempts “small business taxpayers.” For 2026, that means average annual gross receipts of $32 million or less.
• Canadian sole proprietors report interest and bank charges on Form T2125, line 8710. The CRA also says not to deduct interest on money borrowed for personal purposes.

Both countries care about what the borrowed money was used for. If you borrowed for a mix of business and personal spending, split it — and that’s a good moment to ask a CPA or tax advisor.

Common Mistakes

• Mixing personal and business loans. Keep them in separate accounts.
• Recording the loan as income. It isn’t.
• Forgetting to set up the loan first. Without the opening entry, the payments have nothing to reduce.
• Ignoring fees. Track loan fees separately from interest.

The Short Version

A loan payment has two parts. Interest is an expense. Principal reduces what you owe. Record the loan when the money arrives, split each payment using the lender’s numbers, and compare your balance to their statement every month.

This post is general education, not tax or legal advice. For how to treat interest on your own return, check with a licensed CPA or tax advisor.