Principal and interest
Each instalment of a loan has two parts: a repayment of the amount borrowed, which is the principal, and the price of using that money, which is interest.
Instalment = Principal repaid + Interest charged | Interest = Opening balance × Periodic rate
Why it matters
Only the interest is an expense of the period; the principal is a reduction of the debt. Treating the whole instalment as an expense understates profit, and ignoring the principal overstates cash.
Where it appears in a CFO+ model
- In the funding section, which every model asks.
- In the income statement (interest), the balance sheet (debt) and the cash flow (repayments).
Learn the concept in the Academy
Activities where it shows up
This concept belongs to a section that every CFO+ model asks, whatever the activity.
No figures are published: a definition and a formula only.