If you've been making monthly payments on a loan, you will probably need to make an adjusting entry in your general journal at year end so the correct amount of interest expense is on your books, and the loan balance as of year end is correctly shown on your books.

 

Assume that you make a monthly mortgage payment of $1,200. Of course, each monthly payment is part interest, part principal. If you record the correct amount of interest and principal in your cash disbursements journal every month, no adjusting entry would be necessary. An example of such a cash disbursements journal entry:

Chances are, you do not correctly record both interest and principal every month. Do you simply put the entire debit amount to the mortgage payable account every month? Or do you put the entire debit amount to the interest expense account? Either way, you will need an adjusting entry so that your period end books show the proper amount of interest expense and mortgage payable. You should have an amortization schedule, or a statement from your lender, showing you the amount of interest paid for the year and the year-end loan balance. (If you don't have one, your accountant can prepare one for you.)

 

Assume that your monthly mortgage payment is $1,200, and you make the following entry in your cash disbursements journal every month:

Since you haven't recorded interest expense every month, you refer to the statement from your lender. It shows that you paid a total of $7,560.49 in interest for the year. You make the following adjusting entry in your general journal:

Or, assume that you've been making the following cash disbursements journal entry every month:

Since you have been charging the entire payment to interest every month, you need to refer to the statement from your lender. You find that a total of $6,839.51 was paid in principal for the year. Make the following adjusting entry: