Interest Payable

Interest payable is a liability account that shows the amount of interest a business has incurred on its borrowings but has not yet paid as of the balance sheet date. It arises because interest accrues day by day, while payments are usually made on fixed dates, such as monthly, quarterly or every six months. Any interest that has built up since the last payment date is owed to the lender and must be recorded at the end of each reporting period.

Interest payable is a specific type of accrued liability. It is usually classified among current liabilities on the balance sheet, because it is normally paid within the next year, even when the debt itself is long term. It is reported separately from the principal of the loan or bond, which appears as notes payable, bonds payable or the current portion of long-term debt. The lender's side of the same balance is interest receivable.

The amount is the interest accrued between the last payment date and the balance sheet date:

Here $\text{Principal}$ is the outstanding loan balance, $\text{Annual rate}$ is the stated interest rate, $\text{Days accrued}$ is the number of days since interest was last paid, and $\text{Days in year}$ is 360 or 365 depending on the day-count convention in the loan agreement. Many textbooks simplify by using months, so that each month is one twelfth of the annual interest.

On 1 October, a company borrows $300,000 from a bank on a one-year note at 8 percent, with interest and principal payable on 30 September the following year. At its 31 December year end, three months of interest have accrued: $300,000 times 0.08 times 3/12, or $6,000. The company records an adjusting journal entry debiting interest expense for $6,000 and crediting interest payable for $6,000.

On 30 September, the company pays the bank $324,000, made up of $300,000 of principal and $24,000 of interest. The payment entry debits notes payable for $300,000, interest payable for $6,000 and interest expense for $18,000, which covers the nine months of the new year, and credits cash for $324,000. Some companies instead post a reversing entry at the start of the new year so that the full $24,000 can be debited to interest expense on payment; the result is the same.

Bonds work the same way. A company with $2,000,000 of 6 percent bonds payable that pays interest on 30 June and 31 December, but has a 31 March quarter end, accrues three months of interest, $30,000, as interest payable at 31 March.

Interest payable is often combined with other accrued items in a line such as "accrued expenses and other current liabilities," with details in the notes. Under US GAAP, the cash later paid is reported as an operating cash outflow. Interest that has been capitalized into the cost of a qualifying asset still creates interest payable if unpaid; capitalization affects where the debit goes, not whether the liability exists.

Common errors include forgetting to accrue interest at period end, which understates both liabilities and expense, using the wrong day count, and accruing interest on the full original principal of an amortizing loan rather than the outstanding balance. Another frequent mistake is confusing interest payable with accrued interest paid by a buyer of a bond between coupon dates, which is a separate settlement adjustment. Reviewing the debt schedule against the adjusted trial balance at each close is the usual control, and lenders may treat unpaid interest past its due date as a default under the loan contract.