Principal

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?

Related terms

Interest:

The cost of borrowing money, usually expressed as a percentage of the principal over time.

Amortization:

The process of gradually reducing a debt over a period through regular payments covering both principal and interest.

Maturity Date:

The date on which the final payment of a loan or bond is due, including all remaining principal and interest.