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

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.