Interest payable is the interest expense that has been incurred (has already occurred) but has not been paid as of the date of the balance sheet. (The interest payable amount does not include the interest for the periods of time which follow the date of the balance sheet.)
To illustrate interest payable, let's assume that on December 1 a company borrowed $100,000 at an annual interest rate of 12%. The company agrees to pay the principal and 9 months of interest when the note comes due on August 31.
On December 31 the amount of interest payable is $1,000 ($100,000 X 12% X 1/12) and the company's balance sheet should report the following current liabilities:
- Notes payable of $100,000
- Interest payable of $1,000
The future interest of $8,000 (for January through August) is not reported as a liability as of December 31.
The company's January 31 balance sheet should report the following current liabilities:
- Notes payable of $100,000
- Interest payable of $2,000
The future interest of $7,000 (for February through August) is not reported as a liability as of January 31.
