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Why do we make entries for interest expense ?
Why will that Tang pay interest when he is supposed to receive money from his customer?
Hi,
If we have contract with a significant financing component then we need to treat it similar to the characteristics of a loan, hence the interest element.
We are not physically paying interest in the scenario, we are merely just treating the money advanced as a loan and then charging interest upon the principal. Think of the substance of the transaction.
Thanks
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