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Use Interest Payable when you owe an interest payment at a later date.
Scenario: On March 31st, you accrue one month of interest ($10) on $1,000, 12% annual interest note. You will pay the interest accrued once the note matures on June 31st.
The blue underlined text signals...
- You will pay the interest accrued once the note matures. ➡️ We'll be working with Interest Payable.
- Despite not paying it right now, we've still accrue[d] one month of interest. ➡️ We'll expense this through Interest Expense.
The reason is...
- We now owe (+) money in interest to the local bank, and we're liable to pay it.
- This is represented through Interest Payable.
- Which is a liability account, and therefore has a normal credit balance.
- So, to increase it by $10, we'll credit it.
The reason is...
- We have incurred an expense (+) of interest on our note over the past month.
- This is represented through Interest Expense.
- Which is an expense account, and therefore has a normal debit balance.
- So, to increase it by $10, we'll debit it.
ACCRUAL BASIS REMINDER: Although we're not paying off this expense with cash yet... the action of the expense has happened in the current period (March)! So we must follow accrual basis accounting and record the expense right now.
