How to Calculate Interest Payable in Five Straightforward Steps

By Indeed Editorial Team

Published May 28, 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Interest payable is the amount of interest on the debt that a company owes to its lenders. Regardless of your accounting experience and background, knowing what your interest is and how to use it can improve your skillset. Learning about interest payments can be helpful in your career, and you can do it by researching the subject. In this article, we explain what interest payable is, talk about how it compares to interest expense, outline the steps you can take to calculate it and give an example of how to calculate it.

What is interest payable?

Interest payable represents the amount of interest expense that an organization owes to its lenders at a specific moment in time. It appears on an organization's balance sheet as a liability account showing the amount of owed interest accumulated and not paid up to the date of the balance sheet. The amount of unpaid interest typically derives from various loans, bonds, and capital leases that a company owes at the date of reporting the balance sheet. Its opposite is interest receivable, which is the amount of interest that a lending organization is due to receive.

It's usually important for organizations to constantly keep track of their interest payable to ensure that they pay their debts on time and don't accumulate more debt than they can repay. With interest payable being a liability, companies have an obligation to repay it according to the conditions they previously agreed with their lenders. If a company's financial statements indicate an unusual increase in the interest payable account, it may signify a delay in payments.

Related: What Is Accounts Payable? (Required Duties and Skills)

How does interest payable compare to interest expense

Interest expense is the total cost of borrowing funds. Interest payable and interest expense both show aspects of a company's cost for borrowing funds, with some relevant differences between them being:

  • One shows total interest, while the other shows current interest. As opposed to interest payable, which shows the amount of interest that an organization owes at a point in time, interest expense shows the total amount of interest the organization owes due to a loan and records it in its income statement.

  • One shows outstanding expense, while the other shows total expense. Interest payable shows the amount that the organization is due to pay but hasn't done so up to the date of the balance sheet recording. Interest expense includes both interest that the company is due to pay and the interest that it has already paid.

  • One appears in the balance sheet as a liability, while the other is debt. When recording them on a balance sheet, interest payable appears on the liabilities side, and interest expense appears on the debit side. This is because organizations credit their interest payable and debit their interest expense.

Related: What Is a Balance Sheet? FAQs, Components, and an Example

How do you represent interest payable on your company's books?

Considering that interest payable is a liability for an organization, you can add it to the balance sheet section that displays currently active liabilities. You can then add the related interest expense to your income statement. As you gradually reduce the interest payable by paying it off, you can take it off your books by debiting the interest payable account and crediting cash.

How to calculate interest payable

Consider following these steps to calculate the interest payable for your organization:

1. Identify your current notes payable

The first step in calculating your interest payable is determining your notes payable. Notes payable refers to the amount of money you plan on borrowing. For example, a company that wants to make an investment in tools may borrow $20,000 from a private entity, which is then its notes payable.

2. Convert your interest rate to a decimal

The next step is determining the interest rate on your outstanding debt. A loan's interest rate is the percentage that a lender charges over a certain period for borrowing their money. The interest rate is a component of the formula that can help you calculate the interest payable, but you can only use the formula in a decimal form. To do so, simply display a percentage as a fraction of 1. For example, if the interest rate is 9%, its decimal form is 0.09.

3. Determine the period of time for which you want to determine interest payable

As interest payable shows the outstanding interest debt over a certain period, determining that respective amount of time is a vital step toward calculating it. If you want to determine the interest payable over a specific number of months, you can divide the annual interest by 12. Similarly, if the interest period is quarterly, you can divide it by four, and if you want to determine the daily interest, you can divide it by 365.

Related: What Is a Profit and Loss Template? (With Types and Example)

4. Determine the interest rate for the time period you chose

After converting the interest rate to a decimal and deciding on a time period for your interest payable calculation, you can use this information to determine your periodic interest rate. This refers to the interest rate you're due for your selected time period. To calculate your periodic interest rate, divide the interest rate by the time period. For example, if the interest rate in decimal form is 0.09 and you want to calculate your monthly interest, you can divide 0.09 by 12, with the result being 0.0075%.

5. Calculate the interest payable

You can calculate your interest payable by multiplying your notes payable by your periodic interest rate. If we use the figures from the above examples, with notes payable being $20,000 and the periodic interest rate at 0.0075%, the calculation for interest payable is:

0.0075 × $20,000 = $150

This means that the interest payable for the $20.000 loan is $150 per month.

Related: What Is the Difference Between Simple vs. Compound Interest?

Examples of calculating interest payable

Consider these examples of situations in which you can calculate the interest payable over a certain time period:

Example 1

Consider this example of a company calculating its interest payable on a nine-month loan:

On February 21st, a toy manufacturing company borrows $100,000 from a bank to fund a new line of products. The loan's annual interest rate is 15%. The company agrees to pay off the debt in its entirety, plus the outstanding interest, in nine months. When calculating the interest payable, they first determine that the notes payable is $100,000. They then calculate the monthly interest rate by dividing 0.15 by 12, with the result being 0.0125%.

A month later, the company can calculate its interest payable by multiplying the notes payable by the monthly interest rate. The calculation is:

Interest payable after one month = 0.0125 × $100,000 = $1,250

This means that the company owes $1,250 in interest every month until they repay the entire loan nine months later. They can also determine the interest payable for the entire period by multiplying the monthly interest payable by nine, with the calculation being:

Total interest payable =$1,250 × 9 = $11,250

Example 2

Consider this example of a company calculating its quarterly interest payable and determining the part of it that goes into the balance sheet for the year in which they took out the loan:

Lucky Carp Fishing Rod Company borrowed $500,000 to expand their business and agreed to a 10% interest rate per year that they have to pay each trimester. They took out the loan on July 1st and would like to determine the interest payable due after three quarters, on the following April 1st. To do so, they calculate the interest expense on the loan over the nine months. The notes payable in this situation is $500,000, and the quarterly interest rate is the annual rate of 10% divided by four, which is 0.1 / 4 = 0.025.

This means that the interest payable for a quarter is:

0.025 × $500,000 = $12,500

The company pays $12,500 in interest each quarter. The total interest payable over the three quarters they wish to calculate is $12,500 × 3 = $37,500. Since the company took the loan on July 1st, the interest expense they would list in the income statement for that year would be for two quarters. If they took the loan out on January 1st, the interest expense for that year would have been for three quarters.

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