What is accrued interest payable?

Definition

Accrued interest payable is the interest that has already built up on a loan or line and has not been paid yet. On the books, this is a current liability, not the loan itself and not the interest expense.

You record it so the period that used the borrowed money also shows the cost. The lender has earned that slice; the check has not gone out.

Cash-basis books often skip this line and wait for the payment. Accrual books post an adjusting journal entry at cutoff, then clear it when the lender is paid.

This balance is the unpaid interest, not the principal. Notes Payable and a Line Of Credit hold the borrowed balance; this line holds only the interest that has piled up.

Where it shows up

Balance Sheet: Located in the current liabilities section.

P&L: Related to interest already earned by the lender.

Cash flow: Decreases in this account, reported cash from operating activities decreases.

See also: Interest Expense · Debt Schedule · Accrued Liabilities

When you look at your Balance Sheet, this line sits in current liabilities, near other accrued liabilities. The total is interest already earned by lenders that you have not paid yet.

When the balance is high, a lot of interest landed near cutoff without a payment. When the balance is low, you are paying the lender on time, or the books wait for cash.

The profit and loss statement does not list this account as a line. Interest expense already hit the Income Statement when you made the accrual.

On the Statement of Cash Flows, paying the accrued interest is the cash event. This account falls, and reported cash from operating activities falls with it.

A Debt Schedule is the worksheet that lists each loan, rate, and payment date. This statement line is only the unpaid interest leftover.

How it works

The owe gets onto the books at period end, when interest has been earned by the lender and no payment has gone out. You debit interest expense and credit this account.

That entry is an adjusting journal entry. It does not wait for the bank's statement or the ACH.

A Loan Amortization Schedule splits each payment into principal and interest. The interest piece that has built up before the payment date is what belongs here.

Typical items include a monthly slice on Notes Payable, drawn days on a Line Of Credit, and interest on a term loan between payment dates. The principal stays on the note or the line; only the unpaid interest lands here.

When you pay the lender, you debit this account and credit cash. The expense is not recorded a second time.

If the payment also includes principal, only the interest slice clears this line. The principal slice reduces the loan, not this accrual.

Reconcile the ledger to the debt schedule and to the lender's interest notice. An accrual that was never cleared will keep the liability high after the interest is gone.

On cash-basis books, many of these lines never appear. You record the interest when you pay.

Example

A hardware store has a $20,000 note at 6% annual interest. One month of unpaid interest is $100, and the next payment is not due until April 5.

At March 31 the store records:

Debit: Interest expense $100

Credit: Accrued interest payable $100

Interest expense hits March's Income Statement, and this liability goes up by $100. Cash has not moved.

The Balance Sheet shows the $100 owe in current liabilities. March profit is lower by the $100 the lender already earned.

On April 5 the store pays the $100 and records:

Debit: Accrued interest payable $100

Credit: Cash $100

This account falls back to zero, and cash drops by $100. April does not record the March interest a second time.

Common mix-ups

Accrued interest payable is not the loan. Notes Payable and a Line Of Credit hold the principal; this line is only the unpaid interest.

This account is not the interest expense. The debit hit the P&L; this line is only the remaining owe on the Balance Sheet.

An accrual is not a guess you leave forever. When the lender is paid, you clear this line so the same interest is not sitting in two places.

Related terms

• Interest Expense: The cost of borrowing recorded for the period.
• Notes Payable: Formal loan balances owed to a bank or other lender.
• Debt Schedule: A supporting schedule tracking each loan's balance, payments, rate, and maturity.
• Accrued Liabilities: Expenses incurred but not yet billed or paid at period end.
• Adjusting Journal Entry: An entry made at period end to record accruals, deferrals, and corrections.
• Loan Amortization Schedule: The payment-by-payment breakdown of a loan into principal and interest.
• Current Liabilities: Obligations due within the next twelve months.
• Line Of Credit: A revolving loan the business can draw on and repay as cash needs change.