How to Record an Accrued Interest Payable

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At the end of each accounting period, a business must record adjusting entries to acknowledge any interest it has accrued, or accumulated, over the period. The company may incur interest costs because it has borrowed cash from a lender or has issued debt, such as bonds, notes or commercial paper. The adjusting entries recognize the interest currently due to the lender.

Journal Entries

  • The period-end procedure recognizing accrued interest is to debit the interest expense account and credit the interest payable account, which is a liability account. For example, suppose your company borrowed $100,000 on Oct. 1 at an annual interest rate of 5 percent, payable quarterly. The annual interest expense is $100,000 times 5 percent, or $5,000. Every quarter, you accrue interest of $1,250. Your end-of-period adjusting entry, dated Dec. 31, is to debit the interest expense account for $1,250 and credit the interest payable account for $1,250. You would repeat this procedure every quarter until you pay back the loan.

Relieving the Liability

  • You don't necessarily pay the lender when you enter the adjusting entry. For example, your arrangement might call for payment 15 days after the end of the quarter. In a process called relieving the liability, you would, in the example, wire $1,250 to the lender on Jan. 15. The accounting entry on Jan. 15 would be a debit to the interest payable account and a credit to the cash account, both for $1,250.

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