Which journal entry records interest expense and interest payable on notes payable when interest is accrued?

• A. Debit Interest Expense, Credit Cash or Interest Payable; if interest accrues, Debit Interest Expense, Credit Interest Payable.
• B. Debit Interest Expense, Credit Cash.
• C. Debit Interest Payable, Credit Interest Expense.
• D. Debit Interest Revenue, Credit Interest Expense.

Answer: (C)

When interest on notes payable accrues, you recognize the cost in the period and the obligation to pay. The proper entry is to debit Interest Expense to record the incurred cost, and to credit Interest Payable to reflect the liability you owe to the lender. Cash is not involved at the accrual moment because payment hasn’t been made yet.

So, the correct approach increases both expense and a separate liability: it shows you incurred interest, even though you haven’t paid it.

The alternative that debits Interest Payable and credits Interest Expense would reduce the liability and reverse the expense, which does not match how accrual accounting handles interest that has been incurred but not yet paid.