Interest Calculations & Amortization

Module 3:
Cash, Receivables, Payables

Duration:
45-60 minutes

Level:
Beginner to Diploma-Level

➛ Calculate simple interest on notes payable and receivable

➛ Understand the concept of amortization

➛ Prepare an amortization schedule

➛ Record journal entries for interest accrual and payment

➛ Distinguish between interest expense and interest payable

➛ Explain how amortization affects financial statements

➛ Simple Interest
➛ Principal
➛ Interest Rate
➛ Time Period
➛ Interest Expense
➛ Interest Payable
➛ Amortization
➛ Amortization Schedule

Interest = Principal × Rate × Time

Time is expressed in years | months ÷ 12

Amortization is the process of paying off a loan through regular payments that include

➛ Interest portion
➛ Principal portion

Over time
➛ Interest decreases
➛ Principal repayment increases
➛ Loan balance reduces to zero

Accruing Interest | End of Period

Paying Interest and Principal

Income Statement
➛ Interest Expense

Balance Sheet
➛ Notes Payable | remaining balance
➛ Interest Payable | if unpaid

Calculate the interest for each case

➛ 5,000 at 10% for 6 months
➛ 12,000 at 8% for 9 months
➛ 20,000 at 6% for 1 year

For each situation, identify
· Principal
· Rate
· Time
· Interest Expense or
· Interest Income

1. A company borrows 15,000 at 12% for 1 year

2. A business lends 8,000 at 9% for 6 months

A business borrows 6,000 at 12% annual interest for 1 year, payable in 3 equal installments.

Tasks

➛ Calculate interest for each period

➛ Prepare a simple amortization schedule

➛ Identify total interest paid

Prepare journal entries for

➛ Accruing interest at month-end
➛ Paying one installment including interest and principal
➛ Paying the final loan balance

A company takes a loan of 24,000 at 10% interest, repayable over 2 years with equal annual payments.

Questions

➛ Calculate annual interest for Year 1

➛ Explain how amortization affects interest expense over time

➛ Which part of each payment reduces the loan balance?

➛ Where does interest expense appear in the financial statements?

➛ What happens to Notes Payable after the final payment?

➛ State the formula for simple interest.

➛ What is amortization?

➛ True or False | Interest is calculated on the outstanding balance.

➛ Which account records the cost of borrowing?

➛ What happens to interest expense over time in an amortized loan?

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Answers ➧ Here

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Credit Policies & Collection Management ➧ Here