6750 — Interest Expense

Every loan payment you make is really two payments wearing one coat. Part of it repays what you borrowed, and part of it is the price you paid for borrowing. Only the second part is an expense. The first part just moves money from your bank account to your loan balance — you are no poorer for it, you have simply swapped an asset for less debt.

This is why a loan payment is never a single-line transaction. If you book the whole $1,200 payment as an expense, you have overstated your costs by however much of it was principal, and your loan will never appear to go down. If you book the whole thing against the loan, your profit is overstated because the interest you genuinely paid never reaches the profit and loss.

Your lender tells you the split. Almost every loan statement shows principal and interest as separate lines, and an amortization schedule shows it for the whole life of the loan. Take those two numbers and post them as one entry with three lines: interest here, principal against 2700 Loans Payable, and the total against the bank account it left.

Credit-card interest belongs here too, for the same reason. The purchases you made on the card are already recorded as their own expenses; the finance charge on top is a separate cost of carrying a balance, and lumping it in with the purchases hides how much the borrowing itself costs you.

Where it shows up

Interest Expense sits in the expenses section of your profit and loss, below gross margin, because borrowing is a cost of financing the business rather than a cost of doing the work. Lenders and accountants often want to see it separately for exactly that reason — it is what turns operating profit into net profit.