Answer to Question #189682 in Accounting for Milan

Question

What is the difference between Interest Accrued and Interest Expense?

Can you give me a simple definition and example to understand this concept? Thank you.

Answer 1

Solution:

Interest Accrued refers to interest charges that have been incurred or recognized in the books of accounts but are yet to be paid. It can also be an amount of interest that has accumulated over a period of time and recorded in the books of account but has not been paid at a particular date.

Examples of accrued interest can be loan interest and bond interest which are recognized before the actual payment is made. The borrower will debit the interest expense account and credit the accrued interest payable account.

 

Interest Expense, on the other hand, refers to the cost of borrowing funds that are paid once incurred. It is reported on the income statement as a non-operating expense.

An example of interest expense is the bank loan interest that is charged monthly, quarterly, semi-annually, or annually on the principal amount. The borrower will debit the interest expense account and credit cash or bank account.