JournaldrillAccrued interest
Interest builds up with time, so at period end a borrower debits Interest Expense and credits Interest Payable for the interest incurred but not paid, and a lender debits Interest Receivable and credits Interest Revenue for the interest earned but not received. Interest equals principal times annual rate times the fraction of a year.
Syntax
Interest = Principal x Rate x Time; Dr Interest Expense / Cr Interest Payable (borrower); Dr Interest Receivable / Cr Interest Revenue (lender)| Part | What it is |
|---|---|
Principal | Face amount of the note or loan. |
Rate | Annual interest rate, even on a short note. |
Time | Fraction of a year: months/12, or days/360 or days/365 depending on the convention stated. |
Interest Payable / Interest Receivable | Balance sheet account that holds the accrued amount until cash moves. |
Examples
Dr Interest Expense 150 / Cr Interest Payable 150Result: Expense up 150, liabilities up 150
10,000 note at 6% outstanding for 3 months: 10,000 x 6% x 3/12 = 150.
Dr Interest Receivable 90 / Cr Interest Revenue 90Result: Assets up 90, revenue up 90
6,000 customer note at 9% held for 60 days using a 360-day year: 6,000 x 9% x 60/360 = 90.
At payment: Dr Interest Payable 150, Dr Interest Expense 50 / Cr Cash 200Result: Liability cleared, one more month of expense recorded, cash down 200
The note pays 4 months of interest at maturity; 3 months were accrued last period.
Common mistakes
- Using the annual rate without prorating: a 6% rate on a 3-month note means 1.5% for the period, not 6%.
- Recording accrued interest only when it is paid: the expense belongs to the period in which the money was borrowed.
- Crediting Notes Payable for the accrued interest: the note stays at principal; interest goes to a separate payable.
Practice Accrued interest
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- Accrued interest on a noteOn September 1, Copper Kettle Cafe borrowed $24,000 from its bank by signing a one-year, 6% note payable. Principal and all interest are due at the end of the year. Record the interest adjusting entry on December 31.
- Paying a note at maturityOn November 1, Redstone Signs signed a $30,000, 6-month, 6% note payable. On December 31 it correctly accrued $300 of interest for two months. On April 30, the maturity date, Redstone pays the note and all interest. Record the April 30 payment.
Questions
How do you calculate accrued interest?
Principal times the annual rate times the time outstanding as a fraction of a year. For example 10,000 x 6% x 3/12 = 150.
Is accrued interest an expense or a liability?
Both, on different statements: Interest Expense on the income statement and Interest Payable on the balance sheet until it is paid.
Related
- Notes payableHow to record a promissory note: Dr Cash, Cr Notes Payable when borrowing; Dr Interest Expense, Cr Interest Payable at period end; repayment at maturity.
- Notes receivableHow to record a promissory note from a customer: Dr Notes Receivable, Cr Accounts Receivable; accrue interest income; collect at maturity; dishonored notes.
- Accrued wagesHow to record wages employees earned by period end but are paid later: Dr Wages Expense, Cr Wages Payable. With the payday entry and reversing entry.
- Bond interest and amortizationHow to record each bond interest payment and amortize the discount or premium: Dr Interest Expense, Cr Cash, with Discount credited or Premium debited.