Question

In the current fiscal year, the company has obtained a new loan, and interest started accumulating immediately but has not yet been paid. Which of the following entries is correct when recording the loan, and when recording interest accrual?

Answer 1

When you record the loan the journal entry should be:

• Dr Cash account xxx
• Cr Notes Payable account xxx

Cash was received so it must increase, while a liability is created.

When you record interest accrual the journal entry should be:

• Dr Interest Expense account yyy
• Cr Interest Payable account yyy

Interest is an expense therefore it should be debited, since it hasn't been paid yet it is a liability.