Loans for companies

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When a loan is paid, whether personal or mortgage, there are always two separate items in each installment: principal and interest. As you well know, the principal is the part of debt that is returned while interest is the price charged by the one who lends the money for doing so (usually a bank).

 

Company loans

money loan

Regarding the loans of the company (I mean only and exclusively these) the only thing that taxes when paying less taxes are interest. And it is that the result of the activity is determined by subtracting the expenses from the income. Only expenses. And the repayment of the principal of a loan is not an expense. An expense is a decrease in the company’s assets:

  • The salary of workers, for example, is an expense because it implies an outflow of money without entering any other asset in its place.
  • The rent of the premises, for example, is an expense because the outflow of funds that entails only involves the use of the property for a while but that is not an element that is part of my heritage.
  • The interests of a loan are expenses because, as in the previous examples, they assume that the treasury decreases and does not increase, as a result of this decrease, any other business assets.

On the other hand, the return of a loan is not an expense because it does not imply a decrease in assets:

  • There is an outflow of money, so the asset decreases.
  • There is a decrease in a debt, so the liability also decreases.

If the asset decreases and the liability decreases in parallel, the company’s equity remains the same. Therefore, if there is no equity decrease there is no expense. You will see it clearly with an example.

The company has the following assets:

The company has the following assets:

  • Money in banks 10,000 dollars.
  • Short-term debts 10,000 dollars.
  • The equity of the company is 0, which is the difference between what you have (10,000 dollars in the bank) less what you owe (10,000 dollars of loan).
  • The company returns 4,000 dollars of the loan, so its assets will be:
    • Money in banks 6,000 dollars.
    • Short-term debts 6,000 dollars.
    • The company has 0, which is again the difference between what it has (6,000 dollars in the bank) and what it owes (6,000 dollars of loan).

As there has been no decrease in assets there is no expense, and therefore no item that subtracts from income.

Now suppose that the company returns those same 4,000 dollars of loan plus 2,000 dollars of interest. Your assets would be:

  • Money in banks 4,000 dollars.
  • Short-term debts 6,000 dollars

The assets of the company now have decreased: now it is – 2,000 dollars, and that is as a result of 2,000 dollars of interest, which is an expense.

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