Accrue interest: Financial events series, part 28 of 29

 

TechnolOntario has completed their first year of business. Interest has accrued on their loan from the bank and the amount owing to the computer equipment supplier. This accrual must be recorded and an adjustment must be made on the financial statements.

Recall that:

• the bank loan was for $50,000 at an annual interest rate of 6%
• the amount owing on the computers is $10,000 with an annual interest rate of 3.5%

For the accrued interest on the bank loan, the journal entry would record a $3,000 debit for an interest expense and a $3,000 credit for an interest payable liability. [$50,000 x 6% = $3,000]

For the accrued interest on the computers purchased partially on credit, the journal entry would record a $350 debit for an interest expense and a $350 credit for an interest payable liability. [$10,000 x 3.5% = $350]

The financial statements would read:

Information on this series

To demonstrate how various business transactions and other economic events impact the financial statements, this series tracks the accounts of the first fiscal year of a fictional start-up company called TechnolOntario, Inc. Common financial events are introduced and recorded one by one, and they accumulate on the financial statements as TechnolOntario’s fiscal year progresses.

Note that together these examples form a series of 29 articles. Check our complete list of accounting examples to specifically select which ones you’d like to see. Or you can follow the series from start to finish. This article is part 28 of 29.

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References

Markle, K. (2004, August). Introduction to Accounting. Presentation delivered at Schulich School of Business, York University, Toronto, Canada.

Tags: accounting, bookkeeping, loans