Recording Interest - Essay Example

Mr. Stoltz is the owner of Ontime Delivery Service. Recently, Mr. Stoltz paid interest of $3,200 on a personal loan of $60,000 that he used to begin the business. Should Ontime Delivery Service record the interest payment? Explain. On-time Delivery Service should record the $3,200 interest as payment in the books of the company because its principal amount of $60,000 was used as a start-up capital of the business. The $3,200 was the cost of money of the start-up capital. While it can be argued that the loan was made through a personal loan, the money was however used in the business.

Also, when the $60,000 loan was made, it had to be a personal loan because there was still no business to record the amount. But when the business began, the $60,000 was recognized as start-up capital and therefore, it should be recorded as part of the start-up capital. The proper accounting of the $60,000 loan is to record it as part of Current Assets (cash) in the asset portion and liability (loans) in the balance sheet of Ontime Delivery Service. It follows then that interest payment should be recognized by the business along with the repayment when the $60,000 is recorded as a loan.

The way the interest payment should be recognized in the book is through interest expense “and the remainder of the payment reduces the principal amount of the liability. As the amount owed is reduced by each payment, the portion of each successive payment representing interest expense will decrease, and the portion going toward repayment of principal will increase (Williams et al, 2005). Failing to record the $3,200 as interest payment would render the accounting of Ontime Delivery Service inaccurate because the $60,000 in effect will appear to be personal money on the balance sheet when in fact it came from a loan.