What is a Loan Payment?

A loan payment is the amount of money that must be paid to a lender at regular intervals in order to satisfy the repayment terms of a loan. It usually contains two parts, which are an interest payment and a principal payment. During the early years of a loan, the interest portion of this payment will be quite large. Later, as the principal balance is gradually paid down, the interest portion of the payment will decline, while the principal portion increases. This means that the principal portion of the payment will gradually increase over the term of the loan.

Example of a Loan Payment

Absolution Corporation, which produces paraphernalia for churches, makes a monthly loan payment to its lender of $4,000, of which $1,000 is an interest payment and $3,000 is a principal payment. The company’s accountant records the following journal entry to record the transaction:

Debit of $3,000 to Loans Payable (a liability account)
Debit of $1,000 to Interest Expense (an expense account)
Credit of $4,000 to Cash (an asset account)

Controls Over Loan Payment Accounting

A number of controls can be installed that address the loan payment process. Here is a list of the more common controls:

Authorization controls. Loan issuance and payment adjustments must be approved by authorized personnel.
Documentation controls. Maintain accurate records of loan agreements, payment schedules, and supporting documents.
Segregate duties. Separate responsibilities for loan processing, payment recording, and reconciliations to reduce fraud risk.
System access controls. Restrict access to loan accounting systems to authorized personnel only.
Automated payment tracking. Use accounting software to track loan payments automatically and flag overdue payments.
Perform reconciliations. Reconcile loan payment records with bank statements and the general ledger regularly. Investigate discrepancies immediately and document resolutions.
Monitor accounts. Generate regular reports on loan balances, payment status, and overdue accounts, and review them for anomalies or patterns that are indicative of errors or fraud.
Internal audits. Conduct periodic audits of loan records and payment processes.
Exception handling. Develop a process for identifying, investigating, and correcting errors in loan payment records. Maintain a log of corrections made and review them regularly for recurring issues.

At a minimum, you can verify that a loan payment entry is correct by periodically comparing the balance in the Loans Payable account to the remaining principal balance reported by the lender.

These controls help ensure accurate and efficient management of loan payment accounting while reducing risks of errors, fraud, and non-compliance.