Interest Payable

Interest accrued, but not paid

What is Interest Payable?

Interest Payable is a liability account shown on a company’s balance sheet and represents the amount of interest expense that has been incurred to date but has not been paid as of the date on the balance sheet.

 

interest payable

 

For example, if an interest of $1,000 on a note payable has been incurred but is paid in 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 that have 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               86,065

DR Bond Payable                       9,935

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                          850,718

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.

 

Interest Payable in Note Payable

Interest payable accounts also play a role in note payable situations. For example, XYZ Company purchases a computer on January 1, 2016, paying $30,000 upfront in cash and a $75,000 note due on January 1, 2019. The interest rate is 10% and is paid on January 1 of each year.

 

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 Interest Payable                5,635

 

The interest for 2016 has been incurred but is paid on the following year on January 1, 2017, so it is recorded as a liability account in 2016.

 

On January 1, 2017:

DR Interest Payable             5,365

CR Cash                                  5,365

 

The account is then reduced to zero and paid out in cash.

 

Additional resources

This has been a guide to understanding how interest can move between the income statement and balance sheet.  To keep learning and advancing your career, please check out these additional resources: