Which option gives the correct profit effect of loan interest and principal repayment?

Correct answer: Interest reduces profit and principal repayment does not directly reduce profit

The direct answer is A: interest reduces profit, while principal repayment does not directly reduce profit. Interest is the cost of using money, so it is an expense in the Profit and Loss Account. An expense lowers accounting profit. Principal is the original amount borrowed or payable. Paying it back reduces the loan liability and bank balance, but it does not represent a new expense and therefore does not directly reduce current profit. Option A is correct. Option B is wrong because principal repayment is not normally an expense. Option C is wrong because neither item increases profit merely because it is recorded; interest actually reduces it. Option D reverses both treatments, so it is wrong. For example, paying ₹10,000 principal changes liability and cash, whereas ₹1,000 interest lowers profit by ₹1,000. Exam cue: expense affects profit; repayment of principal affects balance-sheet accounts.