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Cash vs accrual – Interest Payable and Interest Expense

Why is there a difference under the cash basis and accrual basis for interest?

This article focuses on cash versus the accrual basis for interest, which includes interest paid in cash, interest expense under US GAAP, and interest payable. The main reason that there is a difference between cash and accrual for interest is that interest expense is accrued based on the terms of the loan. That means that if a company pays interests at the end of 12 months, then they must evenly accrued for that interest expense over 12 months. However, under the cash basis, interest expense would only be recorded when the interest payment is made in cash at the end of 12 months.

What increases or decreases interest payable?

We can use the balance sheet approach to calculate interest expense or the amount of interest paid in cash. To do so, we need to understand what increases or decreases interest payable, which is a liability recorded on the balance sheet. Interest payable is recorded when the company owes interest for a period of time but has not yet made the cash payment for the interest.

Interest payable will increase when a company recorded interest expense. Interest payable will decrease when the company pays makes an interest payment to the lender in cash.

Can you walk me through an example?

Absolutely. So if the question asks how much cash was paid for interest in a particular period, then we know the question will need to provide accrual basis information. For example, the question might tell us that the beginning interest payable balance was $15,000 and the ending interest payable balance was $5,000. They would also need to tell us the amount of interest expense, which would be under U.S. GAAP. Let’s say interest expense was $20,000.

We would setup our rollforward, which always starts with the beginning balance. Then, we would add in the amount of interest expense during the year, which we already decided would increase interest payable. The amount of interest expense paid in cash would be our plug. The final figure is the ending interest payable balance.

All we need to do is solve for the missing plug. Remember, the rollforward must balance! The only figure that results in a balanced rollforward would be negative $30,000, which represents the amount of cash paid for interest. It is negative because paying cash for interest would decrease the interest payable balance.


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