How is interest payable accounted for in adjusting entries?

Interest payable is accounted for in adjusting entries to ensure that the financial statements accurately reflect the company's liabilities and expenses during the reporting period. When an adjustment is made for interest payable, the entry recognizes the cost of borrowing that has occurred but has not yet been paid by the end of the accounting period.

In this case, the correct action is to credit Interest Payable, which increases the liability on the balance sheet, indicating that the company owes this amount in interest. Simultaneously, Interest Expense is debited, which increases the expense on the income statement. This accurately matches the incurred interest expense with the period in which it relates, adhering to the accrual basis of accounting. This method ensures that expenses are recognized when they are incurred, not necessarily when they are paid, providing a clearer picture of the company’s financial performance.