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How do you record the interest that is unpaid on a 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.

To illustrate, let's assume that a company's December loan payment included interest up until December 10. On the company's financial statements dated December 31, the company will need to report the interest expense and liability for December 10 through 31. This is done with an accrual-type adjusting entry dated December 31.