Loan Interest Paid

This Overheads code records the cost of loan interest paid incurred in running the business. As an expense account, it normally carries a debit balance: debit entries increase the balance (recording new costs) and credit entries decrease it (for example, correcting an error or a refund received).

Real-world examples

Manufacturing — equipment finance

A manufacturer takes out a five-year term loan to finance new production machinery. Each monthly repayment splits between capital (which reduces the loan balance on the balance sheet) and interest (the actual cost of borrowing) — only the interest portion is expensed here. A month's interest of £220 is a debit of £220 to 7903 (Loan Interest Paid) and a credit of £220 to 1200 (Bank Current Account), with no VAT involved since interest is outside the scope of VAT.

Property-holding business — commercial mortgage

A business that owns its trading premises outright services a commercial mortgage over a much longer term — 15 to 20 years is typical, against 3 to 5 years for an equipment loan. The same capital/interest split applies: a month's mortgage interest of £850 is a debit of £850 to 7903 and a credit of £850 to 1200. The mechanics don't differ from the equipment loan above, but the scale and term of the borrowing usually do.

Commonly confused with

Because code 7902 (Currency Charges) sits right next to this one in Overheads, it's a common mis-posting target. Code 7903 is specifically for loan interest paid, while 7902 covers currency charges — similar in nature, but keeping them separate is what makes the overheads section of your management accounts meaningful rather than a single lumped total.

What a mis-posting here costs you

An error posting to Loan Interest Paid won't change total overhead spend, but it will distort the overheads breakdown that's usually reviewed line by line each month to spot cost creep.

Other codes in Overheads