You already know that each leasing instalment splits between principal and interest, and that's exactly what causes the most headaches when it's handled by hand. Here we go into the detail: how that split is actually calculated, and why the interest amount isn't the same every month.
Why the instalment doesn't always split the same way
A leasing instalment is usually a fixed amount, but what changes month to month is how it splits between principal and interest. Early in the contract, the outstanding balance is higher, so the interest portion is larger and the principal portion smaller. As the contract progresses and the outstanding balance falls, the opposite happens: more principal gets repaid and less interest is paid each time.
It's the same system as a fixed-instalment mortgage: the same amount every month, but a different internal split.
The amortisation schedule
This is the table that records, month by month, three figures: how much principal is repaid, how much interest is paid, and how much is left outstanding. A simplified example, with round numbers purely to illustrate the mechanics:
| Month | Instalment | Interest | Principal | Outstanding |
|---|---|---|---|---|
| 1 | €1,000 | €150 | €850 | €29,150 |
| 2 | €1,000 | €146 | €854 | €28,296 |
| … | … | … | … | … |
| 36 | €1,000 | €4 | €996 | €0 |
The exact figures depend on the agreed interest rate, the term and the amount financed, but the logic is always the same: interest falls and principal repaid rises, month after month, until the outstanding balance reaches zero at the end of the contract.
Why this matters to your accounting
Every instalment you pay has to be posted as two separate entries: one that reduces the debt (principal) and one that records a finance expense (interest). If the whole instalment is posted as a single expense, without splitting it, you end up inflating the period's finance expense and understating the real reduction in debt — a common mistake when leasing is tracked in a spreadsheet instead of the ERP.
On top of that, the interest portion and the principal portion have different tax treatment in some cases, so splitting them properly isn't just a matter of accounting tidiness.
How it's solved in the ERP
In Business Central's leasing management, the amortisation schedule is generated automatically when you set up the contract with its terms (amount, term, interest rate). Each instalment is posted on its own, with the correct principal/interest split already calculated, with no one having to check a parallel spreadsheet or recalculate anything by hand.
Frequently asked questions
Does the finance company produce the amortisation schedule?
The finance company usually hands you an indicative schedule when you sign the contract, calculated with the agreed rate and term, and in most cases it's accurate. But that document is commercial, not accounting: it's your company that has to post the split between principal and interest month by month in its own ERP, entry by entry, so that your accounts reflect the real reduction in debt and the real finance expense as they happen. The schedule that actually backs your journal entries is the one generated and posted inside your own system, not the finance company's paperwork, which is why relying only on their document without reproducing it in the ERP is a common source of mismatches at year end.
What happens if the contract terms change halfway through?
If you renegotiate the interest rate, the term, or both partway through the contract — which does happen, for instance when a finance company offers better conditions to retain a client — the amortisation schedule doesn't get patched from the old figures. It's recalculated from that exact point forward, using the outstanding balance at the moment of the change as the new starting point and applying the new terms only to the remaining instalments. Everything posted before the change stays as it was; only the future part of the schedule is rebuilt, which is exactly the kind of recalculation that becomes error-prone once you try to do it by hand in a spreadsheet instead of inside the ERP.
Does this also apply to renting?
No, and this is one of the clearest practical differences between the two, which we cover in full in our article on the differences between leasing and renting. There's no principal/interest split to calculate in renting because there's no debt and no financing of a purchase behind the instalment: you're simply paying for the use of an asset for a period, so the whole instalment is posted as a straightforward period expense, with nothing to amortise. This entire mechanism — the schedule, the split, the debt reduction — is exclusive to leasing, precisely because leasing is legally and accountingly a finance lease, while renting never puts the asset or a debt on your balance sheet in the first place.
In summary
The amortisation schedule isn't an accounting formality: it's what guarantees every leasing instalment is recorded correctly, separating what reduces your debt from what's a genuine finance expense. Doing it by hand is manageable with a handful of contracts, but it becomes a real problem as your fleet or machinery pool grows.
If you'd like to stop calculating it by hand, see how leasing management works in Business Central or tell us how many contracts you manage and we'll show you with your own case.