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
Principal does not include interest, fees, or other additional costs.
In financial statements, the principal of a note receivable is recorded as an asset.
Repayment schedules for loans often consist of regular payments that cover both principal and interest.
For long-term liabilities like bonds, the principal amount is typically paid back at maturity.
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?