--- title: "Business Loan Records: Interest, Principal, Covenants | MCC" description: "What to keep for a business loan, how to split each payment between interest and principal, and how to track covenant tests. Includes a worked example." url: "https://mcc-solutionsnj.com/bookkeeping/guides/business-loan-records-interest-principal-and-covenants" --- Bookkeeping guide · Updated October 12, 2026 # Business Loan Records: Interest, Principal and Covenants A loan payment is not an expense. Only the interest part is, and the principal part pays down a liability. Recording the whole payment as an expense is one of the most common errors preparers find, and it distorts both profit and the balance sheet. Here is how to keep loans clean. By [Matthew Coleman](/about), MCC Solutions **Quick answer.** A loan payment is not an expense. Only the interest part is; the principal part pays down a liability. Create a liability account for each loan and record the loan proceeds as a deposit and a credit to that account, not as income. Want this handled for you? Monthly bookkeeping, cleanup and year-end close for small businesses. Start with a free health check of your books. [Free health check](/bookkeeping/health-check)[Get a quote](/bookkeeping/#interest) **Related:** [Trial balance explained](/bookkeeping/guides/trial-balance-explained) · [Owner contribution or loan](/bookkeeping/guides/owner-equity-and-capital-contributions) · [Closing entries and retained earnings](/bookkeeping/guides/closing-entries-and-retained-earnings) **Free tools:** [What should I charge per hour?](/bookkeeping/freelance-hourly-rate-calculator) · [Depreciation schedule calculator](/bookkeeping/depreciation-calculator) [See the interest and payoff date with the business loan payment calculator](/bookkeeping/business-loan-payment-calculator). [![Intuit ProAdvisor Gold tier badge](/img/credentials/intuit-proadvisor-gold.png)](https://proadvisor.intuit.com/app/accountant/search?searchId=matthew-coleman77)Gold tier in Intuit's ProAdvisor program. [See my Intuit listing](https://proadvisor.intuit.com/app/accountant/search?searchId=matthew-coleman77) Keeping your own books? Tallyfinch does invoices, bank import and reports on your computer. [See Tallyfinch](/bookkeeping/mcc-books-downloadable-bookkeeping-software) ## Set up the loan when it starts Create a liability account for each loan. Record the proceeds as a deposit to the bank and a credit to the loan account, not as income. Save the signed note, the amortization schedule, the closing statement and the lender's contact details. Note the interest rate, the term, the payment amount and due date, and any collateral or personal guaranty. Record loan fees separately. Some are spread over the life of the loan, so ask your preparer how to treat them. ## Split each payment Every payment contains interest and principal. The lender statement or amortization schedule shows the split. Record the interest in an interest expense account and the principal as a reduction of the loan liability. Many accounting programs let you set up a recurring entry or a bank rule with a split. Review it after the first few payments. Late fees and penalties go to their own account. They are not interest. ## Reconcile to the lender's statement At least quarterly, compare the loan balance in your books to the statement. They should agree to the cent. If they do not, find the missed or duplicated payment, an unrecorded fee or a rate change. Request a payoff letter or year-end statement every January, which shows interest paid for the year. The preparer will ask for this annual interest figure. Having it ready speeds the return. ## Understand covenants Many commercial loans include promises called covenants, for example keeping a minimum cash balance, maintaining certain ratios, providing financial statements on a schedule or carrying insurance. Read the loan agreement and list each requirement with its due date. Breaking a covenant can allow the lender to demand repayment. Your books are how you prove compliance, so create a report that shows the covenant measure each quarter. ## Owner and related-party loans Money lent by an owner or a relative should be documented with a written note stating the amount, terms and repayment plan. Record it as a loan, not as capital, if that is the intent, and keep a payment log. Loans to owners from the business also need paper and clear records. The tax effects of these loans can be significant, so involve your advisor. Never record an owner loan only because the bank balance needed to be fixed. ## Refinancing and payoffs When a loan is refinanced or paid off, record the payoff amount, the interest to the date, and any fees and prepayment charges. Get a letter confirming a zero balance and keep it permanently. If a lien was filed, confirm that it was released. A final tip concerns timing. Set payment reminders a few days before each due date and record the payment on the day it posts, not weeks later. Late fees often start with a missed reminder, and a lender that sees a pattern of on-time payments is easier to work with when you later ask for a new loan or a covenant waiver. ## Worked example with numbers A $60,000 loan has a $1,850 monthly payment. In month one, interest is $400 and principal is $1,450. Record interest expense $400 and reduce the loan liability by $1,450, with one credit of $1,850 to checking. After month one, the loan balance is $60,000 - $1,450 = $58,550. Compare that balance to the lender's statement. If theirs says $58,550, you are aligned. If there was an origination fee, ask your preparer how to treat it. ## Mistakes that cost money Expensing the entire payment overstates expense and leaves the liability too high. Missing a covenant test date can trigger lender issues. Losing the loan agreement. ## Check your work Each quarter, compare the loan balance to the lender statement and confirm covenant ratios against the agreement. ## Common questions **Should I record the loan payment from the bank feed as a transfer?** Record it as a split transaction between interest expense and the loan liability. A plain expense or transfer misstates the books. **How do credit lines differ?** Draws increase the liability and repayments decrease it, with interest recorded as expense. Statements show the details. **Where do I find the interest paid for the year?** On the lender's year-end statement or a tax form the lender sends, which you should compare with your books. This guide is general information, not tax, legal or accounting advice. Rules, fees and due dates change; check with the IRS, the NJ Division of Taxation or a licensed professional for your situation. Let us handle it [### Monthly bookkeeping Categorizing, reconciling and monthly reports, with cleanup, payroll and NJ filings available. Bookkeeping →](/bookkeeping/) More guides - [Closing a Business: Bookkeeping Steps to the Last Return](/bookkeeping/guides/closing-a-business-bookkeeping-steps) - [Final Payroll and Employee Obligations When Closing](/bookkeeping/guides/final-payroll-and-employee-obligations-when-closing) - [Selling Your Business: Records Buyers Will Ask For](/bookkeeping/guides/selling-your-business-records-buyers-will-ask-for) - [Buying a Business: Opening the Books and First-Year Records](/bookkeeping/guides/buying-a-business-opening-books-and-first-year-records) Free tool - [Bookkeeping health check](/bookkeeping/health-check) [All guides](/bookkeeping/guides) Reach small business owners, freelancers and bookkeepers who read this guide: [advertise here](/advertise#bookkeeping). Do it yourself ### Business Finance Ratios Bundle Read your statements, check the ratios a lender looks at, and model where the business could go, in three linked-by-method workbooks. [See what's inside ($89)](/toolkits/business-finance-ratios-bundle)14-day full refund Excel workbook ### Small Business Loan-Readiness Workbook See debt service coverage, current ratio and debt-to-equity before the bank does, and keep track of the documents a lender will ask for. [See what is inside ($39)](/toolkits/loan-readiness-workbook) Also in the [Business Finance Ratios Bundle](/toolkits/business-finance-ratios-bundle): 3 products for $89 instead of $117 separately. Tallyfinch ### Books you keep on your own computer Tallyfinch does invoices, bills, bank import, reconciliation and the main reports, in a file you own. $99 once, then $5 a month for updates; the app keeps working if you stop the plan. It does not do payroll or sales tax filing. The free download records up to 60 entries. [See Tallyfinch](/bookkeeping/mcc-books-downloadable-bookkeeping-software) [Download it free](/tools/pro/trial/mccBooks) [Compare the three apps](/software) ## Rather have us keep the books? 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