Accrued interest expense journal entry

Introduction

In accounting, interest expense is a type of expense that occurs through the passage of time on the liability account that we have on the balance sheet such as a note payable or loan payable. Likewise, we usually need to make the journal entry for the accrued interest expense at the period-end adjusting entry if we have the note payable or loan payable on the balance sheet.

This is to avoid the understatement of total expenses on the income statement as well as the understatement of total liabilities on the balance sheet. Likewise, the accrued interest expense journal entry will increase the total expenses on the balance sheet and total liabilities on the income statement.

And later, when we make the interest payment, we will need to make another journal entry in order to eliminate the interest payable that we have recorded previously. Of course, if we pay the interest attached to those payables at the same time of the period-end adjusting entry or the interest itself is insignificant or immaterial to the financial statements, there won’t be a requirement for the accrued interest expense journal entry.

Accrued interest expense journal entry

We can make the accrued interest expense journal entry by debiting the interest expense account and crediting the interest payable account at the period-end adjusting entry.

Account	Debit	Credit
Interest expense	$$$
Interest payable		$$$

This journal entry of the accrued interest expense is made to recognize and record the expense that has already occurred for the period. At the same time, it is also made to record the liability that exists for we have not made the cash payment yet.

Later, when we make the cash payment for the interest, we can make another journal entry with the debit of the interest payable account and credit of the cash account to clear this liability.

Account	Debit	Credit
Interest payable	$$$
Cash		$$$

This journal entry is made to eliminate the interest payable that we have recorded previously from the balance sheet.

Accrued interest expense example

For example, on July 1, 2021, we have issued a promissory note to a bank in order to borrow the $50,000 loan in which we promise to pay back the $50,000 principal of the loan with a 10% annual interest attached on January 1, 2022. And December 31 is our period-end adjusting entry in which we need to close the company’s account for the year.

In this case, on July 1, 2021, we can make the journal entry for a $50,000 loan with the note payable as below:

Issue note payable for the loan on July 1, 2021:

Account	Debit	Credit
Cash	50,000
Notes payable		50,000

Then, on December 31, 2021, which is our period end adjusting entry for 2021, we can make the journal entry for the accrued interest expense in order to record the $2,500 ($50,000 x 10% x 6/12) of interest for 2012 as below:

Accrued interest expense on December 31, 2021:

Account	Debit	Credit
Interest expense	2,500
Interest payable		2,500

This journal entry of the $2,500 accrued interest is necessary at the end of our accounting period of 2021. If this journal entry is not made, our total expenses on the income statement as well as total liabilities on the balance sheet will be understated by $2,500 for the 2021 financial statements.

Later, on January 1, 2022, when we pay back the $50,000 loan with the 10% annual interest or the $2,500, we can make the journal entry to clear the note payable and interest payable as below:

Payment of note payable with interest on January 1, 2022:

Account	Debit	Credit
Notes payable	50,000
Interest payable	2,500
Cash		52,500

This journal entry will eliminate the $50,000 note payable that we have recorded on July 1, 2021, as well as the $2,500 interest payable that we have recognized on December 31, 2021. Likewise, this journal entry will decrease both total assets and total liabilities on the balance sheet by $52,500 as of January 1, 2022.