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The capital balance on the loan account is shown in the balance sheet by debiting the bank or cash account and crediting a liability account for the loan. The interest which accumulates on the loan is captured as finance costs on the income statement on an annual basis. All capital payments reduce the loan balance shown on the balance sheet at the end of each period. Since most repayments include both capital and interest in one amount, an ammortisation schedule needs to be drawn up or obtained from the bank. using these tools the interest and capital portion of the repayment can be separated and accounted for respectively.
