Loans are often a necessary part of corporate financing. It is important to account for these obligations properly on the balance sheet so that investors will have an understanding of corporate liabilities. The Financial Accounting Standards Board has issued a series of generally accepted accounting principles, or GAAP, that guide the classification and presentation of financial statement items. Future loan interest does not appear on the balance sheet, while principal balances are classified according to when they are due.

Things You Will Need

  • Amortization schedule

  • Promissory note

  • Recent loan statements or record of payments

Identify the principal balance due for the next 12 months. This can be found on the amortization schedule for the loan or obtained by asking your lender. This amount is the current portion of the loan payable.

Identify the principal balance due for the remainder of the loan, excluding the next 12 months. This amount is the noncurrent portion of the loan payable.

Calculate any accrued interest expense. This is any interest expense that the company has incurred but not yet paid. For example, assume you have a loan due on December 28. When you make that loan payment, you pay interest up to December 28. You would include the interest for December 29, 30, and 31st as an accrued liability.

List the current portion of the loan payable and any accrued interest expense under the current liabilities section of the balance sheet. The noncurrent portion should be listed under the other liabilities section of the balance sheet.

Tip

Current and noncurrent are accounting terms used for time period classification. Current liabilities are those obligations that are due within the next year, while noncurrent liabilities are those obligations that are due in more than one year. An example of the correct treatment follows. Assume that as of Dec. 31, 2011, your company has a mortgage loan with a remaining principal balance of $350,000. During the next year, there will be due 12 payments of $3,100, for a total of $37,200. According to the promissory note, this is comprised of $10,200 in principal repayment and $27,200 in interest. On the December 2011 balance sheet, the $10,200 that is principal due in the next 12 months will be the loan payable, current portion. The remaining $339,800 -- $350,000 principal balance minus the $10,200 in payments -- will be presented as loan payable, noncurrent portion.

Warning

Future interest payments are not included on the balance sheet. Interest becomes a liability only after the expense has been incurred. A company can always choose to prepay a debt obligation and thus not incur future interest charges. Accrued interest expense, however, must be included.