Why is Principal Repayment not on the Income Statement/P&L Statement? (Accounting Question)


It seems if you only include interest expense and do not include the required payment on the principal, the Income Statement would seem misleading.

In: Other

This is because it’s not a loss. It’s a balance sheet and cash flow item in the same way as when the loan is taken out it doesn’t appear as a profit either.

The interest counts as a loss as it is a permanent reduction in shareholders funds – likewise investment income is included as profits. the purchase and sale of equity investments (including acquisitions) only are accounted for in respect of the gain or loss made, not the total capital spent or recouped.

Well it would be double counting the cost of whatever the loan was used to purchase because it will be expensed through depreciation. Eg you borrow $100k to buy some equipment, you pay the interest as an expense on top of that, and the equipment depreciates over its useful life, accruing $100k expenses and the interest into the P&L.

Principal payments would be shown on Statement of Cash Flow, on the Balance sheet (cash account) is reduced due to payment as is the liability (loan) to keep it balanced.

Principal reduction is the reduction of an asset (cash probably) for the reduction in liability (the debt). It shows up in the balance sheet.

Think about it this way, if you took $1,000 in cash to purchase $1,000 worth of inventory – is there a profit or loss generated in this transaction? If not, it wouldn’t show up in the P&L.

Because assets – liabilities stays the same.

If you have $15k in cash, and you owe $5k on a car that’s worth $8k, your net worth is $15k cash + $8k car – $5k loan = $18k.

If you pay off the loan, you now have $10k in cash, your net worth is still the same: $10k cash + $8k car – $0k loan = $18k.

Basically every asset / liability has a value for accounting purposes, and you don’t have profit / loss converting between your assets / liabilities at that accounting value.

That is, if you got a deal from the lender and spent $4k to settle the loan, you’d need to add a $1k profit to your P/L to make -$4k cash balance with $-5k liabilities. If due to interest you end up paying them $6k to settle a debt that your books showed was $5k, similarly you need to add $-1k loss to make it balance.