Interest Payable Journal Entry

Interest payable is the amount of interest that company owes to the bank or creditors.

When the company borrows money from a bank or other creditors, it will record it as debt on the financial statement. The company is required to pay back this debt plus an extra cost which is the interest expense.

Interest payable on a loan refers to the periodic interest payments that are required to be made by the borrower to the lender under the terms of the loan agreement. The interest rate is typically stated as a percentage of the outstanding principal balance and is paid over the life of the loan. Interest payments are usually made on a monthly basis, but can also be made on a quarterly or yearly basis, based on the loan agreement.

The interest payments on a loan can have a significant impact on the income statement if the company relies on debt rather than equity. It is important to carefully compare the interest rates offered by different lenders before taking a loan.

Borrowers should also be aware of any penalties that may be associated with their loan. By making regular, on-time interest payments, borrowers can improve their credit score and potentially save money on interest costs.

The time of paying interest will depend on the loan schedule agreed between borrower and lender. The interest expense record on the income statement is prepared at the end of the month.

Journal Entry for Interest Payable

The creditors charge interest to the company base on the interest rate and accounting period. The customer record interest expense base on this period as well, it will not be related to the payment.

At the end of the accounting period, company calculates the interest expense base on the principle and interest rate. After that company will record interest expense into income statement while the other side impacts the interest payable.

The journal entry is debiting interest expense and credit interest payable.

The journal entry will increase the interest expense on income statement. As the company has not yet made a payment, it will create interest payable on balance sheet.

On the scheduled date, company has to pay the interest to bank or creditor. The journal entry is debiting interest payable and credit cash.

The journal will not impact the expense, it simply reverses the interest payable and reduces cash balance.

Example

Company ABC borrows $ 100,000 from the bank with an interest rate of 6% per year. The company has to pay the interest expense of $ 500 per month, it is paid on the 5th of each month. Please prepare a journal entry for interest paid.

ABC has to record the interest expense $ 500 per month based on the money borrowed and the interest rate.

At the end of the month, the journal entry is debiting interest expense $ 500 and credit interest payable $ 500.

On the 5th of next month, company has to pay the interest to bank, they have to reverse the interest payable and credit cash.

The journal entry is debiting interest payable and credit cash.