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Principal

from class:

Financial Accounting I

Definition

The principal is the original sum of money borrowed in a loan or invested, excluding any interest or dividends. It is the base amount on which interest payments are calculated.

5 Must Know Facts For Your Next Test

  1. Principal does not include interest, fees, or other additional costs.
  2. In financial statements, the principal of a note receivable is recorded as an asset.
  3. Repayment schedules for loans often consist of regular payments that cover both principal and interest.
  4. For long-term liabilities like bonds, the principal amount is typically paid back at maturity.
  5. The reduction of the principal balance over time through payments is known as amortization.

Review Questions

  • What component of a loan payment reduces the original amount borrowed?
  • How is the principal amount treated differently in notes receivable versus accounts receivable?
  • Why is understanding the principal important for calculating interest expenses?
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