Interest Payable: Meaning, Example, and How to Calculate

At its core, interest payable is about understanding what your business owes in unpaid interest and when it needs to be paid. Kahit parang simple lang ito, it’s actually a key part of managing your finances effectively.

When properly tracked, accrued interest ensures your financial records are accurate and compliant with regulations, like those set by the Bureau of Internal Revenue (BIR) and Bangko Sentral ng Pilipinas (BSP).

Nakakatulong din ito sa businesses to plan ahead for payments at maiwasan ang penalties. It helps build stronger relationships with lenders by meeting obligations on time.

This article will discuss the concept of interest payable, its importance for businesses, and how you can manage it effortlessly using the right tools.

What is Interest Payable?

Interest payable, also known as accrued interest, refers to the amount a business owes for borrowing money. It is recorded in company ledgers to track outstanding obligations and appears as a liability on the balance sheet.

This account reflects unpaid interest as of the reporting date, typically arising from loans, bonds, or capital leases. Instead of including the full interest expense, businesses record only the portion of interest still due at the balance sheet date.

Interest payable is classified as a liability and is typically listed under the current liabilities section of the balance sheet. The corresponding interest expense, which contributes to the expense, is recorded on the income statement for the relevant reporting period.

This expense appears after operating profit because it pertains to financing activities rather than core operations.

For example, if interest of PHP 50,000 on a note payable has been incurred but is not due to be paid until the next fiscal year, for the current year ended December 31, the company would record the following journal entry:

• DR Interest Expense 50,000
• CR Interest Payable 50,000

What is Interest Payable Important?

Interest payable is crucial due to several specific reasons:

1. Accurate Financial Reporting: The BSP, through Circular No. 494, emphasizes that financial institutions must comply with Philippine Financial Reporting Standards (PFRS) to ensure fairness, transparency, and accuracy in financial reporting.
2. Tax Compliance: Proper accounting is essential for compliance with the Bureau of Internal Revenue (BIR) regulations. The BIR allows the deduction of interest expenses from taxable income, provided they are duly documented and meet specific criteria.
3. Regulatory Adherence: The Bangko Sentral ng Pilipinas (BSP) requires financial institutions to maintain precise records of liabilities, including interest payable.
4. Accurate Reporting for Lenders: The expense ensures lenders see exactly how much the company owes at a given time. For instance, if a company has PHP 200,000 in accrued interest, this must appear on the balance sheet to maintain transparency.
5. Cash Flow Preparation: Knowing the exact amount helps businesses allocate funds for future payments. For example, if PHP 50,000 in interest is due next month, it helps the finance team set aside cash for timely payment.

Simply put, keeping track of accrued interest is key to a good accounting system, avoiding tax issues, and keeping your business finances in good shape.

Examples of Interest Payable

Liability accounts are often used in bond instruments because a company’s fiscal year end might not match the bond payment dates. For instance, ABC Corporation issued 8% bonds on January 1, 2023, for PHP 5,200,000 with a maturity value of PHP 5,000,000.

The bond yield is 6%, it matures on January 1, 2028, and interest payments are due every January 1.

On January 1, 2023:

• DR Cash: PHP 5,200,000
• CR Bond Payable: PHP 5,200,000

This entry records the issuance of a premium bond, as the issuance price exceeds the maturity value. The premium (PHP 200,000) will be amortized over the bond’s five-year life.

On December 31, 2023:

• DR Interest Expense: PHP 312,000
• DR Bond Payable: PHP 40,000 (PHP 200,000 ÷ 5 years)
• CR Interest Due: PHP 352,000

The interest expense is calculated by multiplying the bond’s carrying amount by its yield (PHP 5,200,000 × 6%). The interest expense account is used temporarily, as the payment will be made on January 1. The bond payable account decreases to reflect the premium’s amortization.

Balance Sheet on December 31, 2023:

• Bond Payable: PHP 5,160,000
• Interest Payable: PHP 352,000

On January 1, 2024:

• DR Interest Payable: PHP 352,000
• CR Cash: PHP 352,000

This entry removes the payable account since the interest payment is made in cash. This payment represents the bond’s coupon payment.

How does Interest Payable Work?

Understanding how interest payable works in accounting is crucial for accurate financial reporting and effective debt management. Let’s break it down step by step to see how businesses handle this process in their financial records.

1. Accrual of Interest: In accrual accounting, you record expenses when they happen, not when you pay them. So, as time passes, any unpaid interest on a loan is recorded as an expense, even if the payment will happen later.
2. Recording Interest Payable: At the end of the period, the company notes down the unpaid interest by adding it as an expense and marking it as a liability (money owed). This is done by increasing the “interest expense” and “interest payable” accounts.
3. Payment of Interest: When the company finally pays the interest, it decreases the “interest payable” account (removing the liability) and records the payment in the “cash” account to show money has been spent.

Managing these entries manually can get overwhelming, especially if your business deals with multiple loans or liabilities. This is where reliable accounting software can make the difference.

Since every software has its own features, you might want to read about our recommendation of the best accounting software in the Philippines. However, HashMicro is also one of the most reliable options that’s worth every peso to spend on. Click below for the pricing calculator!

Interest Payable vs. Interest Expense

While both interest payable and interest expense relate to a company’s borrowing costs, they differ in key ways:

Total vs. Current Interest

Interest expense reflects the total interest owed on a loan and is recorded on the income statement. In contrast, interest payable represents only the unpaid interest currently due, focusing on the amount incurred within a specific period. For example, if a loan was taken three months ago, the payable would include only the amount for those three months.

Outstanding vs. Paid Expense

Interest payable refers to an outstanding amount that remains unpaid as of the balance sheet date. Interest expense is a paid expense already incurred and settled. For instance, a company may report an annual interest expense of PHP 1,500,000, but its interest payable might only be PHP 125,000 (PHP 1,500,000 ÷ 12).

Liabilities vs. Expense Reporting

On the balance sheet, interest payable is recorded as a liability, while interest expense is recorded as a debt-related expense. This distinction arises because companies credit interest obligation and debit interest expense in their accounting entries.

How to Calculate Interest Payable

Here are the steps to calculate an organization’s interest payable:

• Identify the Notes Payable

Start by determining the loan amount (notes payable). This is the amount you agreed to borrow. For example, if you’re opening a business and borrow PHP 750,000 from a friend, that amount is your notes payable.

• Convert the Interest Rate to a Decimal

Find the interest rate, which is the percentage charged by the lender, and convert it into a decimal. For instance, a 9% interest rate becomes 0.09. This decimal form will be used in your calculations.

• Determine the Calculation Period

Decide the time period for which you want to calculate the interest payable. For monthly calculations, divide by 12; for quarterly, divide by 4; for daily, divide by 365. For example, to calculate interest payable over the next five months, use 12 as the denominator.

• Find the Periodic Interest Rate

Divide the interest rate (in decimal form) by the chosen time period to get the periodic interest rate. In the example above, 0.09 ÷ 12 equals a periodic rate of 0.0075.

• Calculate the Interest Payable

Multiply the notes payable by the periodic interest rate to find the interest payable. For instance, PHP 750,000 x 0.0075 equals PHP 5,625. This means your monthly accrued interest for the loan is PHP 5,625.

Simplify Interest Payable Management with HashMicro

Imagine juggling multiple loans with varying interest rates and payment schedules. Manually calculating interest payable for each loan can feel like solving a never-ending math problem. Now, multiply this effort by 10 if you’re handling a growing business with more loans, bonds, or capital leases.

But what if there was a way to automate all of this? With HashMicro’s Accounting Software, every calculation is automated, precise, and tailored to your business needs.

From tracking notes payable to calculating interest over specific periods, the system ensures accuracy in real-time. No more double-checking formulas or worrying about missing liabilities; HashMicro keeps everything organized in one platform.

To simplify managing interest payable and improve financial accuracy, here are the key features of HashMicro Accounting Software that can help:

• Bank Integration – Auto Reconciliation: This feature automatically matches the transactions recorded in your bank account with your internal bookkeeping.

• Bank Integration – Auto Payment: Automates scheduled payments for liabilities, including interest, so that they are paid on time without manual intervention.

• Cash Flow Reports:  Provides detailed insights into your company’s cash inflows and outflows in real time to understand how interest payments affect your overall liquidity.

• Financial Ratio Analysis: Automatically calculates key financial ratios, such as the debt-to-equity and interest coverage ratio to assess your company’s ability to manage debt and interest obligations.

• Financial Statement with Budget Comparison: Compares your actual financial data, including interest expenses, with your planned budget.

Conclusion

Interest payable is the unpaid interest from loans or debts na kailangan bayaran ng isang business. It ensures that financial records are correct, obey the regulations, and the company’s cash flow is sound.

Kaya naman, HashMicro’s Accounting Software is here to help make your life easier. It automates interest calculations, tracks liabilities, at mapapanatiling updated ang records mo in real time.

Bukod dito, features like auto reconciliation, scheduled payments, and cash flow reports simplify managing your finances. Hindi mo na kailangang mag-worry sa errors, at mas confident ka sa decisions mo. With HashMicro, you can now manage your financial obligations hassle-free.

Are you interested already? Try the free demo now!

FAQ on Interest Payable

• How does accrued interest affect a company’s financial statements?

  Accrued interest appears as a current liability on the balance sheet, showing the amount a company owes but hasn’t yet paid. This liability reflects the company’s obligation to creditors and impacts its short-term financial commitments.

• What is the difference between accrued interest and interest receivable?

  Accrued interest refers to the amount a company owes on its debts, recorded as a liability. On the other hand, interest receivable is the income a company is entitled to receive from its investments or loans, recorded as an asset.

• Can unpaid interest impact a company’s tax obligations?

  Yes, unpaid interest can affect a company’s tax obligations. The interest expense linked to unpaid interest is typically tax-deductible, reducing the company’s taxable income. However, tax treatment may vary depending on jurisdiction and applicable tax laws.