Interest payable is the amount of interest on its debt and capital leases that a company owes to its lenders and lease providers as of the balance sheet date. This amount can be a crucial part of a financial statement analysis, if the amount of interest payable is greater than the normal amount - it indicates that a business is defaulting on its debt obligations.
Interest payable can include both billed and accrued interest, though (if material) accrued interest may appear in a separate "accrued interest liability" account on the balance sheet. In the case of capital leases, a company may have to infer the amount of interest payable, based on a deconstruction of the underlying capital lease. Interest is considered to be payable irrespective of the status of the underlying debt as short-term or long-term debt. Short-term debt is payable within one year, and long-term debt is payable in more than one year.
As an example of interest payable, a business owes $1,000,000 to a lender at a 6% interest rate, and pays interest to the lender every quarter. After one month, the company accrues interest expense of $5,000, which is a debit to the interest expense account and a credit to the interest payable account. After the second month, the company records the same entry, bringing the interest payable account balance to $10,000. After the third month, the company again records this entry, bringing the total balance in the interest payable account to $15,000. It then pays the interest, which brings the balance in the interest payable account to zero.
The interest that a company will incur in the future from its use of existing debt is not yet an expense, and so it is not recorded in the interest payable account until the period in which the company incurs the expense. Up until that time, the future liability may be noted in the disclosures that accompany the financial statements.
Interest payable is a liability, and is usually found within the current liabilities section of the balance sheet.
The associated interest expense that comprises interest payable is stated on the income statement for the amount applicable to the period whose results are being reported. This interest expense is stated after the operating profit, since interest expense is related to financing activities, not operations.
The reverse of interest payable is interest receivable, which is the interest owed to the company by the entities to which it has lent money.