What Is Interest Payable? (Plus How To Find It)
Interest payable is the amount an individual or company owes a lender at a particular time but hasn't paid yet. This helps businesses keep track of their liabilities in their balance sheet and create their financial statements. Understanding how to find your interest payable can help ensure you make debt payments on time. In this article, we define interest payable, compare interest payable with interest expense, explain how to calculate interest payable and provide an example of a company calculating theirs.
What is interest payable?
Interest payable, or accrued interest, is the amount incurred from borrowing money that's owed to a lender. Businesses record this value in their ledgers to keep track of what they owe. It serves as a liability account on a business's balance sheet. Interest payable represents the amount of interest a company has acquired and hasn't paid. This is usually from interest on debt, bonds or capital leases the company owes currently. Companies record the interest amount that's currently unpaid as of the date of reporting the balance sheet, rather than including the entire amount of interest expense.
Why is interest payable important?
Keeping track of your interest payable is important to ensure you are paying your debts on time. If the financial statements show an unusual increase in the account, it may represent a delay in payments. Because interest payable is a liability, you have an obligation to pay the agreed amount. Interest payable is part of your business financial statements to keep track of your financial activities.
Interest payable vs. interest expense
While both interest payable and interest expense deal with a company's cost for borrowing funds, they vary slightly. Some differences between interest payable and interest expense include:
Total vs. current interest
Interest expense records the total amount of interest a company owes on a loan in its income statement. However, interest payment only records the amount of interest an organization owes currently and hasn't paid. Interest payment looks at the amount incurred in a set period. For example, if the company is three months away from when they took out their loan, they would only record the amount incurred during the past three months.
Outstanding expense vs. expense
Interest payable is an outstanding expense, or an amount due but not yet paid as of the date of the balance sheet recording. Interest expense is a traditional expense, which was due and paid. For instance, a company may have an interest expense of $25,000 for the past year, but their interest payable may only be $2,083.33 ($25,000 / 12).
Liabilities side vs. debt side
On the balance sheet, an interest payable appears on the liabilities side. Companies record the interest expense on the debt side of their balance sheet. This is because organizations credit their interest payable and debit their interest expense.
How to calculate interest payable
Follow these steps when calculating your organization's interest payable:
1. Identify your notes payable
To calculate your interest payable, first, find out what your notes payable is. Notes payable is the agreed-upon amount you plan to borrow. For instance, if you're looking to open a new business, you may agree to borrow $15,000 from a friend.
Related: What Is Notes Payable?
2. Convert your interest rate to a decimal
Next, identify what your interest rate is. This is the percentage a lender charges for borrowing their money. When you have your interest rate, convert it into a decimal. For instance, if your interest rate is 9%, then it would become 0.09 in decimal form. This allows you to use the rate in your formula later.
3. Determine the period of time to calculate
Decide the amount of time to calculate for your interest payable. For calculations that look at the interest payable over a set of months, divide by 12. If your interest period is quarterly, divide by four, and if it's a daily calculation, divide by 365. For instance, if you want to find the interest payable for your new business loan over the course of the next five months, you would use 12 for your bottom numeral.
4. Find your periodic interest rate
Once you have your interest rate decimal and period of time, divide the interest rate by the period of time. This calculation gives you your periodic interest rate. So for the above example, your fraction would be 0.09 / 12. This gives you a periodic interest rate of 0.0075%.
5. Calculate the interest payable
Now, to find your interest payable, multiply your notes payable by your periodic interest rate. For the above example, our interest payable would be:
$112.50 (0.0075 x $15,000) = $112.50
This means that your interest payable for your loan from your friend is $112.50 a month.
Example of interest payable
Here's an example of interest payable to help you understand how it works:
On January 4, Higgins Woodwork Company borrows $50,000 to open a new factory location. The loan has an annual interest rate of 15%. Higgins Woodwork Company makes an agreement with their lender to repay the $50,000 plus a 10-month interest when the payment is due on October 4.
By February 4, Higgins Woodwork Company has an interest payable amount of $625 or:
[($50,000) x (0.15 x 12 months)]
In their balance sheet, they record the following liabilities:
Notes payable: $50,000
Interest payable: $625
By March 4, Higgins Woodwork Company has an interest payable amount of $1,250 or:
[($50,000) x (.15 x 12 months) x (2)]
Their current balance sheet for March would include:
Notes payable: $50,000
Interest payable: $1,250
By the third month, April 4, Higgins Woodwork Company has an interest rate of $1,875 or:
[($50,000) x (.15 x 12 months) x (3)]
Their balance sheet for April would include:
Notes payable: $50,000
Interest payable: $1,875
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