Repayment schedule

What it means

A repayment schedule breaks a debt into instalments: the date, the amount, the principal part, the interest part and the balance left. It differs from permission to pay tax in instalments in that it comes from an agreement with a creditor, not from an official decision.

With an annuity payment the amount stays the same while the mix shifts: interest dominates at the start, principal towards the end. An extra payment in the first years therefore saves far more than the same sum paid near the end.

A repayment schedule is not only a banking product. It also arises when a company agrees with a supplier to spread an overdue invoice, and a written agreement with instalments is at the same time an acknowledgement of debt. That changes how the limitation period runs, so the creditor gains time it would no longer have without the agreement.

How it works in practice

In the books every instalment splits: principal reduces the liability on the balance sheet, interest goes to the expenses of the period. With leasing the schedule often doubles as the tax document for VAT deduction when it carries the invoice particulars.

The schedule drives cash planning, and on refinancing the bank issues a new one. The balance at the reporting date is split into the part due within a year and the long-term part, or the balance sheet shows liquidity the company does not have.

When an instalment falls in January but part of its interest belongs to December, the December interest is expensed at the balance sheet date even though it is paid only in the new year. At the year-end we therefore read the schedule day by day rather than instalment by instalment, as the accrual principle requires.

What to watch out for

The expensive mistake is posting the whole instalment to expenses. Costs rise by the principal, which is not a deductible expense, and in an audit the tax administrator adds it back and imposes a penalty for every year affected.

On a floating-rate loan, or once the fixed-rate period ends, the bank recalculates the schedule. Anyone who keeps booking by the old breakdown splits instalments into principal and interest wrongly, and the difference surfaces only when the loan balance is agreed with the bank at the year-end, by which time months of entries need correcting.