Interest Payable Journal Entry
Overview
Interest payable is the payment obligation that the company owes to its bank or creditor for the borrowing or note payable that it has. As the amount of interest accumulated throughout the passage of time, the company needs to make the journal entry to account for interest payable at the period end adjusting entry if the interest payment is not made at the same date of the adjusting entry.
On the other hand, if the interest payment is made at the date of period-end adjusting entry, there is no need to record the interest payable as the company will just record the expense with the cash outflow for the interest payment.
Interest payable journal entry
The company can make the interest payable journal entry by debiting the interest expense account and crediting the interest payable account.
| Account | Debit | Credit |
|---|---|---|
| Interest expense | $$$ | |
| Interest payable | $$$ |
This journal entry is usually made at the period end adjusting entry to record the interest payable and expense when the interest payment on borrowings has not been made yet.
When the company makes the payment, it can make the journal entry for interest payment as below:
| Account | Debit | Credit |
|---|---|---|
| Interest payable | $$$ | |
| Cash | $$$ |
This journal entry is made to record the cash outflow for the interest payment together with the removal (debit) of the interest payable that the company has recorded in the prior period.
Interest payable example
For example, on Jan 1, 2020, the company ABC borrows $50,000 money from the bank to expand its business operation. The company ABC is required to pay $3,000 of the interest on Jan 1, every year for 5 years and the principal payment is required to make in the total amount at the end of the borrowing period.
What is the journal entry for the interest?
- on Dec 31, 2020, when the company makes the year-end adjusting entry (assuming no accrual has been made so far)
- on Jan 1, 2021, when the company makes the first interest payment
Solution:
On Dec 31, 2020
The company ABC can make the interest payable journal entry on Dec 31, 2020, as below:
| Account | Debit | Credit |
|---|---|---|
| Interest expense | 3,000 | |
| Interest payable | 3,000 |
If this journal entry is not made, the company’s total liabilities in the balance sheet as well as total expenses in the income statement will be understated by $3,000.
On Jan 1, 2021
When the company ABC makes the payment on Jan 1, 2021, it can make the journal entry for interest payment as below:
| Account | Debit | Credit |
|---|---|---|
| Interest payable | 3,000 | |
| Cash | 3,000 |
This journal entry will eliminate the $3,000 of interest payable that the company has recorded on Dec 31, 2020.