Accounting › Section L · Long-term liabilities › Topic L.2

The effective-interest method

A loan or bond costs its borrower interest at the market rate, even when the cash payments say otherwise. The effective-interest method charges that true rate to the balance still owed each period, and an amortisation table lays out every number the journal entries will need.

In this topic

  • What amortisation means
  • Instalment notes
  • Worked example: a note amortisation table
  • The method for bonds
  • Discounts: the carrying value rises
  • Worked example: amortising a discount
  • Premiums: the carrying value falls
  • Worked example: a premium and a final adjustment
  • Checking a table
  • The straight-line alternative
  • Common mistakes to avoid
  • Key takeaways

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