In a loan payment, which account is debited to reduce the loan balance (principal portion)?

• A. Interest Expense
• B. Cash
• C. Liability (loan)
• D. Revenue

Answer: (C)

When you pay down a loan, the part that reduces the amount owed is a reduction of a liability. In double-entry accounting, debiting the loan liability decreases the balance of that liability, so the loan payable account is debited to show the principal portion being paid. The cash you pay is recorded as a credit, reflecting the outflow of funds. The interest portion, on the other hand, is recorded as an expense (Interest Expense) and is also debited, since expenses increase on the debit side. Revenue is not involved in loan payments. So the principal reduction is recorded by debiting the liability account for the loan.