Accounting for a loan consists of a series of operations, based on an international valuation standard (the IFRS), which are intended to record this in the accounting of the company, so that the faithful image is reflected.
In a simple way, this process consists of a series of notes that reflect the different phases from when they lend us the money, until we return it. Normally they are the moment of the concession and the payment of the different capital and interest installments of the loan. All this following the indications of international standards (IFRS-IFRS). To carry it out, a series of calculations must be performed.
Post a loan. The amortized cost
Many people fear having to count a loan, especially because they don’t know exactly how to do it. In most countries of the world, accounting standards (which in turn are based on IFRS-IFRS) include the concept of “amortized cost”. But what exactly is it and what is it for?
Simply explained, it is a way to calculate the financial cost of a loan that takes into account all the cats that are included. Thus, when our bank grants us a loan, it informs us of the so-called TIN or nominal interest rate. Many believe that this is the cost of the loan and yet nothing is further from the truth.
There are certain expenses to consider, such as opening or registration fees and some are not included in the Annual Equivalent Rate or APR. Hence, we must calculate that real effective interest rate, which, in turn, allows us to know the amortized cost of the loan in each period.
The loan accounting process
With the diversity of international standards and accounting and tax applications in each country, it is difficult to write about how to account for a loan. But there are some common points to keep in mind. We must differentiate small companies from large ones. In the former, certain licenses are usually allowed, in the latter not so much. All this with the aim of preserving the faithful image of the company.
The small or medium-sized company usually has the accounting standards adapted. We cannot complicate its management excessively because resources are much more limited. Therefore, it is usually allowed that these expenses included in the loan be taken directly to the income statement. In this way, they can use their own nominal interest, since it is equivalent to cash. The large ones are usually governed by the amortized cost and in the small ones that is optional, although sometimes recommended.
A simple example
Imagine a loan of 100,000 monetary units (um) at 5% interest. The expenses are due to an opening commission of 1% on capital and CU500 for registration. We will not complicate it anymore, since it is not necessary.
As we see in the table, the nominal interest or TIN is 5% but the equivalent annual cash (not to be confused with the APR) is 5.5% due to expenses. In this way, the first table, that of the bank, serves as a reference for an SME, which should bring the total expenditure to results, at the time of the concession. This would be CU1,000 (1% of 100,000) and CU500,000. The annual fee is calculated according to the French method .
In the case of large companies, the table to be used would be that of amortized cost (the one below), which calculates interest taking into account effective interest and not nominal interest. In this case the expense is shared between the periods of duration of the loan. This way of accounting for a loan is much more realistic and optional for all companies.