Why isn’t paying back a loan an expense?

here’s one way I can explain this. This is the accounting equation Assets = Liabilities + Owner’s Capital + Revenues – Expenses – Owner’s Draws
For Corporations it’s Assets = Paid-in Capital + Revenues – Expenses – Dividends – Treasury Stock

The simplified version is Assets = Liabilities + Equity

The equation has to be in balance. Every transaction affects 2 accounts.
Thus, if an asset goes down (like the bank account did when you took money from it to pay the loan), then the equation must come back to balance. This means that either another asset has to increase by the same amount (like if you were purchase a new stove, or if you simply transfer it to another account).
The loan is a liability. The cash in your bank is an asset. So if the asset went down and the liability went down, that would keep the equation in balance. if you pay off the loan, then you did not expense the money, you simply reduced a liability. To expense something means it’s not already owed.

Posted in Bookkeeping Questions, professional bookkeeping

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