Which financial statements are affected by accrued interest at year-end?

• A. Increases Interest Expense on the income statement and increases Interest Payable on the balance sheet.
• B. Increases Interest Expense only.
• C. Increases Cash.
• D. No effect.

Answer: (A)

Accrued interest is interest incurred in the period but not yet paid in cash. Under accrual accounting, you recognize the expense now and the obligation you owe. The entry increases Interest Expense on the income statement and increases Interest Payable on the balance sheet. Cash isn’t affected at year-end because the payment hasn’t happened yet; it will change only when the company pays the interest, at which time you would debit Interest Payable and credit Cash. So the effect is on both the income statement and the balance sheet.