Recording accrued interest payable requires calculating the amount of interest.
An accrued interest payable, or accrued expense, is interest expense that has incurred but has not been paid. Accrued interest payable usually occurs with notes that a company takes out. The notes accrue interest expense through the life of the note. The interest expense is typically recorded each period; however, it is not paid until the note matures. At that time the company pays the face value of the note plus all accrued interest payable. At the end of each period, an adjusting entry records the accrued interest payable from the period.
Instructions
1. Determine the amount of interest expense for the period. Notes have a face value, due date and stated interest rate. To calculate the amount for the period, a simple calculation is made using the formula I = PRT; where I stands for interest, P for principal, R for rate and T for time. To calculate the amount of interest for the period, the principal is multiplied by the interest rate and the time.
2. Perform the calculation. Suppose the bond has a $10,000 face value, 6 percent interest rate and a duration of two years. To calculate the adjusting entry for one month, the equation would look like this: I = $10,000 x 0.06 x 1/24. The answer is $25. At the end of each month, an adjusting entry to reflect $25 of accrued interest payable is recorded.
3. Record the entry. At the end of the month, the entry is recorded by debiting the account Interest Expense for $25 and crediting the account Accrued Interest Payable. This adjusting entry is recorded each month the business holds the note.
4. Understand the purpose. The purpose of these adjusting entries is to record interest expense in the proper period in which it occurred. If expenses are not recorded in the period in which they occur, net income is affected. Failure to record these entries also understates liabilities on the company's balance sheet, causing the net income to be overstated.
5. Record the payment of the interest. When the note matures, all accrued interest payable is paid off. This requires an entry of debiting Accrued Interest Payable, debiting Notes Payable and crediting cash.
