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If you take a $1MM loan from a bank: - Your bank account (an asset) goes up by $1MM - Your loan account (a liability) goes up by $1MM So equity is unchanged
by rahimnathwani 5y ago
If you take a $1MM loan from a bank:
- Your bank account (an asset) goes up by $1MM
- Your loan account (a liability) goes up by $1MM
So equity is unchanged at that point.
But every month after that, you'll be charged interest:
- Loan account (liability) increases (CR)
- P+L account (equity) decreases (DR)
- ALittleLight 5y agoPresumably you'd have to pay back more than you get in the loan, right? Wouldn't your liability increase by more than a million dollars?
- brewdad 5y agoNot until the interest accrues. You could (no idea why you would) borrow $1MM and immediately pay it back before owing any interest. You would need to reflect this on your books but nothing material has changed.
- thaumasiotes 5y ago> You could (no idea why you would) borrow $1MM and immediately pay it back before owing any interest. Can you in fact do that? It's possible with a residential mortgage in the US, because there are laws prohibiting prepayment penalties. And I think even those don't apply to refinanced mortgages?
- avianlyric 5y agoYes, just because it’s hard to find a lender that will except those terms doesn’t mean it’s not possible.