Before You Start

This guide assumes you have access to the official loan amortization schedule and your accounting software’s loan register.

Overview

25 min
Setup Time
Intermediate
Difficulty
Quarterly
Review Frequency

What You’ll Learn

  • How to identify common discrepancies in loan amortization
  • Steps to analyze your accounting software’s loan register
  • Creating adjusting journal entries for principal and interest
  • Ensuring your loan liability matches the official bank statement

1. Understanding the Problem

Loan accounting requires precise tracking of principal and interest. Discrepancies can arise from several factors:

Common Causes

  • Timing differences between payments and accruals
  • Incorrect initial loan setup in accounting software
  • Partial or additional principal payments not correctly recorded
  • Errors in manually splitting principal and interest

Signs of Discrepancy

  • Loan liability balance doesn’t match bank statement
  • Interest expense seems too high or too low
  • Inability to reconcile the loan account in your software
  • Audit adjustments required for loan balances

2. Gathering Your Data

To effectively reconcile, you need both your internal records and the official bank documentation.

Source A: Internal Records (Accounting Software)

This reflects how you’ve recorded loan payments.

Pros:
  • Immediately accessible.
  • Reflects your entries.
  • Shows payment history.
Cons:
  • May contain errors.
  • Doesn’t validate against bank.
  • Can obscure underlying issues.

Source B: External Records (Bank/Lender Statements)

These are the official documents showing loan balances and amortization.

Expert Tip: Always prioritize the official amortization schedule from your lender. This document is the ultimate source of truth for principal and interest allocation and remaining liability.

3. Step-by-Step: Reconciliation Process

Follow these steps to systematically identify and correct discrepancies.

Here is a sample data structure for a loan payment to compare:

{
  "payment_date": "2025-01-15",
  "total_payment": 500.00,
  "principal_paid": 350.00,
  "interest_paid": 150.00,
  "remaining_balance": 99650.00
}

4. Correcting Discrepancies (Adjusting Entries)

  1. 1

    Identify the Discrepancy Period

    Pinpoint the specific payment(s) or period where your records diverge from the amortization schedule. Often, the cumulative effect builds over time.

  2. 2

    Calculate the Adjustment

    Determine the difference in principal and interest expense between your records and the official schedule for the identified period. This often involves adjusting previous interest expense and the loan principal account.

  3. 3

    Create an Adjusting Journal Entry

    Debit or credit the Interest Expense, Loan Payable (Principal), and potentially a Retained Earnings or a suspense account if correcting prior year errors.

Crucial Tip: Prior Period Adjustments

If corrections relate to prior fiscal years, you might need to adjust opening balances, typically through Retained Earnings, rather than current period expense accounts.

5. Ongoing Monitoring

Maintaining Accuracy Checklist

  • Review your loan amortization schedule monthly or quarterly
  • Compare your accounting software’s loan balance to the bank statement
  • Verify interest expense for the period aligns with the schedule
  • Promptly investigate and correct any small variances

Need Help?

Expert Assistance

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