Interest Accrued on Notes Payable Adjusting Entry

Interest accrued on notes payable refers to the interest expense that has been incurred but not yet paid by the end of an accounting period. An adjusting entry is necessary to recognize this expense in the correct period and to record the corresponding liability.

Scenario:

A company has a note payable with a principal amount of ₹500,000 at an annual interest rate of 8%. The interest is payable semiannually on June 30 and December 31. By the end of the accounting period on June 30, interest has accrued but not yet been paid.

Interest Calculation: $\text{Accrued Interest} = \text{Principal} \times \text{Rate} \times \frac{\text{Time}}{\text{Year}}$ $\text{Accrued Interest} = ₹500,000 \times 8\% \times \frac{6}{12}$ $\text{Accrued Interest} = ₹500,000 \times 0.08 \times 0.5 = ₹20,000$

1. Recording the Accrued Interest

Particulars	Debit (₹)	Credit (₹)
Interest Expense A/c	20,000
To Interest Payable A/c		20,000
(Being interest accrued on notes payable)

Explanation:

1. Interest Expense A/c is debited to recognize the interest expense for the period.
2. Interest Payable A/c is credited to record the liability for the accrued interest that has not yet been paid.

Adjusting Entry at Year-End

If the accounting period ends on December 31, and the interest for the last six months needs to be accrued, the process remains the same.

Scenario:

Accrued interest for the second half of the year:

Interest Calculation: $\text{Accrued Interest} = ₹500,000 \times 8\% \times \frac{6}{12} = ₹20,000$

2. Recording the Accrued Interest

Particulars	Debit (₹)	Credit (₹)
Interest Expense A/c	20,000
To Interest Payable A/c		20,000
(Being interest accrued on notes payable)

Explanation:

1. Interest Expense A/c is debited to recognize the interest expense for the period.
2. Interest Payable A/c is credited to record the liability for the accrued interest that has not yet been paid.