Interest Expense v/s Interest Payable

Are you confused between the two terms, interest expense and interest payable? In simple terms, interest expense is what you pay for your loan as an interest to the bank or from the company you take a loan, while interest payable is the net amount that you have to pay for your loan as interest. You might take loans, credit, or bonds in your business or personal usage.

There are different types of loans that ask for interest generation, creation, and management. Loans may include home loans, education loans, property loans, asset loans, car loans, etc. And with each loan, you definitely invite interest expense and interest payable with it. Most people get confused between the two as they appear the same when it comes to paying.

Although it seems like interest expense is the total amount you have to pay, the interest payable is the amount you did not pay. Then what is the difference between the two? If you have stuck on this question, you are at the right place. If you wish to know, let's find it out here.

Meaning

Interest Expense: Interest Expense is the total amount that you pay for a taken loan for a fixed duration of time. In simple words, it is the cost of the borrowed amount.

You have to show it in your income statement as a non-operating expense. It may come as a credit, loan or bond. It is an expense account.

Interest Payable: Interest Payable is the amount to pay, but you haven't paid that yet. It is a liability account.

Application

Interest Expense: Suppose you take a loan of $100,000 at an annual interest rate of 5% on the 1st of December. According to the loan's agreement, you have to pay each month's interest on the 10th day of every month. Hence the amount of $416.67 for the December interest you will pay on the 10th of January.

In your income statement, you will have to mention %416.67 as interest expense for December month.

Interest Payable: So, based on the above example, your balance sheet will cover $416.67 for December expenses.

Records

Interest Expense: If you consider the difference based on records, interest expense is available in accounting records with a debit.

Interest Payable: Interest Payable is in accounting records with a credit.

Payment

Interest Expense: According to payment, interest expense is the amount already paid or might not to the lender. It covers the entire incurred value for a loan or money you take from someone.

Interest Payable: Interest Payable is the record of the net value you have to pay or say the amount need to pay, but you haven't paid yet.

Calculation

Interest Expense: To calculate interest expense, you have to debt amount for the reporting period.

Interest Payable: In the case of interest payable, reporting period does not matter. You need to consider the unpaid interest amount calculate it.

Bottom Line

With the discussion above, you might feel both are similar, but dear readers, you should understand the slight difference between the two. Interest Expense and Interest Payable both are for debt. But the first one is for debit while later for credit. And you cannot mix debit and credit together as it will create a big problem in managing your finances.

So, avoid any confusion because one is for the income statement (Interest Expense) while the other is for the liability account (Interest Payable). With this note, hoping that you are now comfortable with the difference. Next time you compare Interest Expense and Interest Payable, know that Interest Expense can be an asset or a liability while Interest Payable is only a liability.