The difference between interest expense and interest payable
/What is Interest Expense?
Interest expense is the cost of borrowed funds. It is reported on the income statement as a non-operating expense, and is derived from such lending arrangements as lines of credit, loans, and bonds. The amount of interest incurred is typically expressed as a percentage of the outstanding amount of principal.
What is Interest Payable?
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 tends to be relatively low, since it is usually paid to the lender on a monthly basis. If the payment terms were longer, then the interest payable balance would have more time in which to increase in size.
Comparing Interest Expense and Interest Payable
There are several differences between the two concepts. First, interest expense is an expense account, and so is stated on the income statement, while interest payable is a liability account, and so is stated on the balance sheet. Second, interest expense is recorded in the accounting records with a debit, while interest payable is recorded with a credit. Third, interest expense may or may not have been paid to the lender, while interest payable is the amount that has definitely not yet been paid to the lender. And finally, interest expense is calculated based on the amount of debt outstanding over the reporting period, while the amount of interest payable is unrelated to the reporting period - it is simply the amount of interest that has not yet been paid.
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Examples of Interest Expense and Interest Payable
Thimble Clean, a maker of concentrated detergents, borrows $100,000 on January 1 at an annual interest rate of 5%. Under the terms of the loan agreement, Thimble is required to pay each month’s interest by the 5th day of the following month. Therefore, the $416.67 of interest incurred in January (calculated as $100,000 x 5% / 12) is to be paid by February 5. Therefore, the company reports $416.67 of interest expense on its January income statement, as well as $416.67 of interest payable on its January balance sheet.