Loan Amortization Schedule

A loan amortization schedule is a table that lists every scheduled payment on an installment loan and shows how much of each payment covers interest, how much reduces the principal, and what balance remains afterwards. It is prepared for term loans, car loans, equipment finance and mortgages that are repaid in equal installments over a fixed period. The general idea of spreading a debt over time is covered in the entry on the amortization schedule; this entry focuses on how the schedule is built and used in the accounts of a borrower or lender.

Accountants rely on the schedule to record interest expense correctly each period, to split the loan between current and long-term liabilities on the balance sheet, and to reconcile the loan account with the lender's statements.

For a fixed-rate loan with level payments, the payment is found with the annuity formula:

• $\text{PMT}$ is the payment per period.
• $P$ is the amount borrowed.
• $r$ is the interest rate per period (the annual rate divided by the number of payments per year).
• $n$ is the total number of payments.

Each period, interest is calculated as the opening balance times $r$. The rest of the payment reduces principal, and the closing balance becomes next period's opening balance. Because the balance falls over time, the interest part shrinks and the principal part grows, even though the payment stays the same. This reflects the time value of money: the loan is an annuity from the lender's point of view.

A company borrows $100,000 at 8 percent a year, repayable in four equal annual payments at the end of each year. The payment is $100,000 times 0.08 divided by (1 minus 1.08 to the power of negative 4), which is about $30,192.08.

Total interest over the life of the loan is $20,768.32, the difference between the four payments of $120,768.32 and the $100,000 borrowed.

At the end of year one the borrower records a journal entry debiting interest expense $8,000.00 and the loan payable $22,192.08, and crediting cash $30,192.08. If payments fall between reporting dates, interest is accrued up to the period end and credited to interest payable. On the balance sheet at the end of year one, the $23,967.45 of principal due in year two is shown as the current portion of long-term debt, and the remaining $53,840.47 is shown as a long-term liability. In the cash flow statement under US GAAP, the principal repaid is a financing outflow, while interest paid is normally an operating outflow; IFRS allows either classification for interest.

The lender uses the same schedule in reverse, recognizing interest income and reducing its loan receivable. For loans with fees or discounts, the schedule is built at the effective rate rather than the stated rate, following the effective interest rate method.

• Monthly loans divide the annual rate by 12 and multiply the term by 12, so a five-year loan has 60 rows.
• A balloon payment structure leaves a large final payment, so the schedule does not reach zero until the last row.
• Interest-only periods show no principal reduction at all until amortization begins.
• Variable-rate loans need the schedule rebuilt whenever the rate resets.

A common error is to treat the entire payment as expense, or to classify the whole loan as long-term and ignore the portion due within a year. Another is to calculate interest on the original amount borrowed rather than the declining balance. Extra principal payments shorten the schedule or reduce later payments, and either way they reduce total interest and overall debt service.