Question

do we write and count the Interest payable but not due in liabilities for Financial Position statement ?

Answer 1

Solution:-

The statement of financial position (commonly known as balance sheet), along with all other financial statements is prepared on the basis of accrual basis of accounting.

Accrual basis of accounting mandates including all expenses that are incurred during the year (whether due to be paid or not) in the financial statements. In other words, all expenses that are related to the year should be included in financial statements whether they were due to be paid during the year or not. In case of an interest on loan, the interest for a year is an expense for that year even if it becomes due for payment in next year. Accordingly, when the interest expense is booked without becoming due during the year, the liability for it is raised in the balance sheet.

How the above is booked in balance sheet?

While preparing the financial statements, the interest expense incurred but not due is treated in both P&L account and balance sheet. The P&L account is debited with interest expense and a corresponding liability account is credited in the name of 'Interest accrued but not due' which is grouped under 'short-term debt' or 'other current liabilities' in the statement of financial position. The journal entry is as follows:

Interest expense A/c Dr.

To Interest accrued but not due A/c (presented under short-term debt or other current liabilities)

Conclusion:

Therefore, as described above, the interest payable but not due is counted and included in financial position statement.