Definition of Interest Unpaid on Note Payable
Interest that has occurred, but has not been paid as of a balance sheet date, is referred to as accrued interest.
Under the accrual basis of accounting, the amount that has occurred but is unpaid should be recorded with a debit to Interest Expense and a credit to the current liability Interest Payable.
Example of Recording Unpaid Interest
Let's assume that on December 10, a company made its monthly payment on a loan and the payment included interest through December 10. On the company's financial statements dated December 31, the company will need to report the interest expense and liability for December 11 through 31. This is done with an accrual adjusting entry dated December 31. If the interest for December 11 through December 31 was $100, the adjusting entry dated December 31 will debit Interest Expense for $100, and will credit Interest Payable for $100.
