Interest Expense Journal Entry

Overview

Interest expense is a type of expense that accumulates with the passage of time. Likewise, the company needs to account for interest expense by making journal entry for such expense that has occurred during the period regardless of whether or not the company has paid for it yet.

Interest expense usually incurred during the period but not recorded in the account during the period. That is why the company usually needs to make the adjusting entry at the end of the period for the interest expense together with other transactions, such as accrued salaries and taxes.

The company makes the journal entry of interest expense at the period-end adjusting entry to recognize the expense that has already incurred as well as to record the liability it owes. Likewise, it is necessary to record interest expense as it occurs to avoid the understatement of both expenses and liabilities in the income statement and the balance sheet respectively.

Interest expense journal entry

The company can make the interest expense journal entry by debiting the interest expense account and crediting the interest payable account.

Account	Debit	Credit
Interest expense	000
Interest payable		000

This journal entry is required to make at the period-end adjusting in order to recognize the interest expense that has occurred in the current accounting period as well as the interest liability that the company owes. Likewise, if the company doesn’t record the above entry, both total expenses and liabilities will be understated.

When the company pays the interest in the next period, it can make the journal entry for the interest paid by debiting interest payable with the interest expense of the new period and crediting the cash account.

Account	Debit	Credit
Interest payable	000
Interest expense	000
Cash		000

This journal entry is made to eliminate the liability that the company has recorded at the adjusting entry of the previous period. At the same time, it is to record the expense incurred during the current period.

Example

For example, on April 16, 2020, the company ABC Ltd. signed a two-year borrowing agreement with XYZ bank in the amount of $50,000. The agreement requires the company to pay monthly interest on the 15^th day of each month with an interest of 1% per month. The principal will be paid at the end of the borrowing term.

In this case, on April 30 adjusting entry, the company needs to account for interest expense that has incurred for 15 days.

So, the company needs to make the interest expense journal entry with the amount of $250 (50,000 x 1%/2) as below:

Account	Debit	Credit
Interest expense	250
Interest payable		250

This journal entry is to recognize $250 of interest expense that charges for the month of April as well as to recognize the $250 of interest liability that the company owes at the reporting date of April 30, 2020.

If the company doesn’t record the above journal entry in the April 30 adjusting entry, both expenses and liabilities will be understated by $250.

On the interest payment date of May 15, 2020, the company ABC will pay the interest of $500 (50,000 x 1%) as in agreement.

In this case, on May 15, 2020, the company will make the journal entry for the interest paid as below:

Account	Debit	Credit
Interest payable	250
Interest expense	250
Cash		500

This journal entry is to eliminate the $250 interest liability that the company has recorded in the April 30 adjusting entry as well as to record the interest expense that has accumulated for 15 days (from 1^st to 15^th of May) in the month of May.