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Comment by xbryanx | Hacker News Reader

Where are you borrowing this money without any interest? "Money you borrow" and "cost to borrow that money" are rarely the same value.

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Normal interest that will be charged if the debt is not paid off is initially neither an asset or liability, it is an expense as it is charged.

If you take a $1MM loan from a bank:

- Your bank account (an asset) goes up by $1MM

- Your loan account (a liability) goes up by $1MM

So equity is unchanged at that point.

But every month after that, you'll be charged interest:

- Loan account (liability) increases (CR)

- P+L account (equity) decreases (DR)

Presumably you'd have to pay back more than you get in the loan, right? Wouldn't your liability increase by more than a million dollars?

Not until the interest accrues. You could (no idea why you would) borrow $1MM and immediately pay it back before owing any interest. You would need to reflect this on your books but nothing material has changed.

> You could (no idea why you would) borrow $1MM and immediately pay it back before owing any interest.

Can you in fact do that? It's possible with a residential mortgage in the US, because there are laws prohibiting prepayment penalties. And I think even those don't apply to refinanced mortgages?

Yes, just because it’s hard to find a lender that will except those terms doesn’t mean it’s not possible.

Interest is not reflected in the balance sheet, but in the income and cashflow statements.

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