Current liabilities are a company’s short-term debts payable or due within a year or one operation cycle/period. Current liabilities are shown in the balance sheet above long-term liabilities or non-current liabilities.
Current liabilities are typically paid off using current assets like cash or cash equivalents. A business must have enough current assets to settle the current liabilities within their due dates.
Some examples of current liabilities include accounts payable, notes payable, etc. Accounts payable is the most common current liability.
Having current liabilities doesn’t mean the company is in a bad financial position as long the current liabilities are being paid off on time using current assets.
Depending on the company’s industry, there can be other kinds of current liabilities listed in the balance sheet under other current liabilities.
Interest payable is a current liability. It is the amount of interest a company owes to a) the lenders it has borrowed any debt from, or b) to the lessor it has leased any capital lease from.
This is the amount incurred but not paid as of the balance sheet date. It doesn’t include any amounts due for any other period (periods after the balance sheet date). Interest payable within a year on a debt or capital lease is shown under current liability.
Any interest that will be payable in the future is an expense the company has not yet incurred so therefore, it will not be recorded in interest payable. Any future or non-current liability on the existing debt will be shown as such on the balance sheet.
The journal entries of interest payable are the same as other payable or liabilities. When the company recognizes interest payable, the entries should be debited to interest expenses in the income statement and credit the interest payable in the balance sheet under the current liabilities of the balance sheet.
And when the company makes the payable, the entries should be debited the interest payable and credit cash or bank balance.
Here is the example of entries,
|XXXX||Interest payable||USD X,XXX|
|XXXX||Interest expenses||USD X,XXX|
Let’s take a look at an example of interest payable. Company A has taken a loan of $1,000,000 from a lender at a 10% interest rate, semi-annually. However, the company would pay this amount after a whole year.
The interest expense at the end of a six months period would be 10% x $1,000,000= $100,000. This will be shown in the income statement, made at the end of the six months, as interest expense.
The journal entry would be interest expense debit and interest payable credit. Hence in the balance sheet, made at the end of the six months, this amount will be shown under current liabilities as interest payable.
Then, after six more months, the company pays off the interest accrued, and the interest payable amount will decrease.
The interest expense linked with the interest payable is shown in the income statement for the accounting period it is to be reported.
This interest expense is subtracted from the operating profit related to financing activities. In contrast to interest payable is interest receivable, which is any interest the company owned by its borrowers.
To conclude, interest expense is the borrowing cost or finance cost the company incurs when it borrows money or leases an asset. Interest payable is the amount due at the end of an accounting year or operating cycle. This amount is a current liability as current liabilities are due within a year.