What is the note payable interest accrual entry?

• A. Debit Interest Expense; Credit Interest Payable.
• B. Debit Interest Payable; Credit Interest Expense.
• C. Debit Cash; Credit Interest Revenue.
• D. Debit Interest Revenue; Credit Cash.

Answer: (A)

When interest on a note payable is incurred, you recognize the cost in the period and set up a liability to pay later. The correct entry is to debit Interest Expense (to record the cost of borrowing) and credit Interest Payable (to reflect the obligation to pay in the future). Later, when you actually pay the interest, you would debit Interest Payable and credit Cash to settle the obligation. The other options don’t correctly reflect an accrual of interest: they would either affect cash or revenue, or reverse the normal relationship between recognizing an expense and establishing a liability.