Which statement about accruing interest on a note payable is true?

• A. The accrued interest is recorded as a debit to Interest Expense and a credit to Interest Payable
• B. The accrued interest is recorded as a debit to Interest Payable and a credit to Interest Expense
• C. The accrual affects only the Note Payable balance
• D. The accrual increases cash and decreases revenue

Answer: (A)

Accruing interest on a note payable means recognizing the cost of borrowing in the period it is incurred, even if you haven’t paid cash yet. This is shown by increasing both an expense and a liability: you debit Interest Expense to reflect the cost of the period, and you credit Interest Payable to record the obligation to pay that interest later.

For example, if $500 of interest accrues in the period, the entry is:

Debit Interest Expense 500

Credit Interest Payable 500

The note payable’s principal balance isn’t changed by the interest accrual itself, since the principal reflects the amount borrowed, not the interest owed. Cash isn’t affected until you actually pay the interest, and revenue isn’t involved in this transaction.

So the correct approach is to recognize the expense and establish the payable as the liability to pay interest in the future.