Interest accrued, but not paid
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What is Interest Payable?
Interest Payable is a liability account, shown on a company’s balance sheet, which represents the amount of interest expense that has accrued to date but has not been paid as of the date on the balance sheet. In short, it represents the amount of interest currently owed to lenders.
For example, if interest of $1,000 on a note payable has been incurred but is not due to be paid until the next fiscal year, for the current year ended December 31, the company would record the following journal entry:
DR Interest Expense 1,000
CR Interest Payable 1,000
Interest payable amounts are usually current liabilities and may also be referred to as accrued interest. The interest accounts can be seen in multiple scenarios, such as for bond instruments, lease agreements between two parties, or any note payable liabilities.
Interest Payable in Bonds
Interest payable accounts are commonly seen in bond instruments because a company’s fiscal year end may not coincide with the payment dates. For example, XYZ Company issued 12% bonds on January 1, 2017 for $860,652 with a maturity value of $800,000. The yield is 10%, the bond matures on January 1, 2022, and interest is paid on January 1 of each year.
On January 1, 2017:
DR Cash 860,653
CR Bond Payable 860,653
The issuance of the bond is recorded in the bonds payable account. The 860,653 value means that this is a premium bond and the premium will be amortized over its life.
On December 31, 2017:
DR Interest Expense 83,869
DR Bond Payable 12,131 (60,653/5yrs)
CR Interest Payable 96,000
The interest expense is the bond payable account multiplied by the interest rate. The payable is a temporary account that will be used because payments are due on January 1 of each year. And finally, there is a decrease in the bond payable account that represents the amortization of the premium.
Therefore, on the balance sheet, the accounts would look like:
Bond Payable 848,522
Interest Payable 96,000
On January 1, 2018:
DR Interest Payable 96,000
CR Cash 96,000
Finally, the payable account is removed because cash is paid out. This payment represents the coupon payment that is part of the bond.
Note Payable
Interest payable accounts also play a role in note payable situations. For example, XYZ Company purchased a computer on January 1, 2016, paying $30,000 upfront in cash and with a $75,000 note due on January 1, 2019. The current interest rate is 10%.
On January 1, 2016:
DR Equipment 86,459
CR Cash 30,000
CR Note Payable 56,349
The note payable is $56,349, which is equal to the present value of the $75,000 due on December 31, 2019. The present value can be calculated using MS Excel or a financial calculator.
On December 31, 2016:
DR Interest Expense 5,635
CR Note Payable 5,635
The interest for 2016 has been accrued and added to the Note Payable balance.
On December 31, 2017:
DR Interest expense 6,198
CR Note Payable 6,198
On December 31, 2018:
DR Interest expense 6,812
CR Note Payable 6,812
On January 1, 2019:
DR Note Payable 75,000
CR Cash 75,000
The Note Payable account is then reduced to zero and paid out in cash.
Additional Resources
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FAQs
What is Interest Payable? Interest Payable is a liability account, shown on a company's balance sheet, which represents the amount of interest expense that has accrued to date but has not been paid as of the date on the balance sheet. In short, it represents the amount of interest currently owed to lenders.
What is an example of interest payable? ›
Example of Interest Payable
A business owes $1,000,000 to a lender at a 6% interest rate, and pays interest to the lender every quarter. After one month, the company accrues interest expense of $5,000, which is a debit to the interest expense account and a credit to the interest payable account.
Is interest payable an asset liability or equity? ›
Current liabilities: Anything due within a year including accounts payable, interest payable, short-term business loans and taxes payable.
What is interest expense vs interest payable? ›
Interest expense, as previously mentioned, is the money a business owes after taking out a loan. It's recorded as an expense in the income statement. Interest payable, on the other hand, is a current liability for the part of the loan that is currently due but not yet paid.
What is an example of interest payment? ›
For example, a five-year loan of $1,000 with simple interest of 5 percent per year would require $1,250 over the life of the loan ($1,000 principal and $250 in interest). You'd calculate the interest by multiplying the principal, the annual percentage rate (APR) and the length of the loan: $1,000 x 0.05 x 5.
What is interest payable also known as? ›
Interest payable amounts are usually current liabilities and may also be referred to as accrued interest. The interest accounts can be seen in multiple scenarios, such as for bond instruments, lease agreements between two parties, or any note payable liabilities.
What is the simple interest payable? ›
Simple interest is an interest charge that borrowers pay lenders for a loan. It is calculated using the principal only and does not include compounding interest. Simple interest relates not just to certain loans. It's also the type of interest that banks pay customers on their savings accounts.
How to determine interest payable? ›
Divide your interest rate by the number of payments you'll make that year. If you have a 6 percent interest rate and you make monthly payments, you would divide 0.06 by 12 to get 0.005. Multiply that number by your remaining loan balance to find out how much you'll pay in interest that month.
How to record interest payable? ›
You must record the expense and owed interest in your books. To record the accrued interest over an accounting period, debit your Interest Expense account and credit your Accrued Interest Payable account. This increases your expense and payable accounts.
Is interest payable a debit or credit? ›
Second, interest expense is recorded in the accounting records with a debit, while interest payable is recorded with a credit.
Some examples of current liabilities that appear on the balance sheet include accounts payable, payroll due, payroll taxes, accrued expenses, short-term notes payable, income taxes, interest payable, accrued interest, utilities, rental fees, and other short-term debts.
Is interest payable operating or financing? ›
Interest and dividends received or paid are classified in a consistent manner as either operating, investing or financing cash activities. Interest paid and interest and dividends received are usually classified in operating cash flows by a financial institution. taxes are generally classified as operating activities.
What is the journal entry of interest payable? ›
Interest Expense Journal Entry (Debit, Credit)
- Interest Payable Account ➝ From the perspective of the company, the interest expense due on the notes payable is debited while the interest payable account is credited.
- Cash Account ➝ Once paid, the interest payable account is debited and the cash account is credited.
Interest is the reward lenders receive for allowing others to use their deposits. Both sides in a credit transaction almost always benefit. Borrowers are able to pur- chase something that may be of value today and perhaps in the future. Lenders are repaid the money that was loaned, plus interest.
Is interest payment an income? ›
Most interest income is taxable as ordinary income on your federal tax return, and is therefore subject to ordinary income tax rates. There are a few exceptions, however. Generally speaking, most interest is considered taxable at the time you receive it or can withdraw it.
Why are credit card rates so high? ›
Card rates are high because they carry more risk to issuers than secured loans. With average credit card interest rates above 20.7 percent, the best thing consumers can do is strategically manage their debt.
What activity is interest payable? ›
Interest paid and interest and dividends received are usually classified in operating cash flows by a financial institution. taxes are generally classified as operating activities.
What is an example of accrued interest payable? ›
Accrued interest is calculated as of the last day of the accounting period. For example, assume interest is payable on the 20th of each month, and the accounting period is the end of each calendar month. The month of April will require an accrual of 10 days of interest, from the 21st to the 30th.
What account entry is interest payable? ›
Interest Payable Account ➝ From the perspective of the company, the interest expense due on the notes payable is debited while the interest payable account is credited. Cash Account ➝ Once paid, the interest payable account is debited and the cash account is credited.
