Which adjusting entry is made for accrued interest?

Accrued interest refers to the interest that has been incurred but not yet paid or recorded in the accounts. When an adjusting entry is made for accrued interest, it reflects the amount of interest that is owed at the end of a reporting period but has yet to be disbursed.

The correct entry involves debiting interest expense to recognize the cost of interest for the period, as it is considered an expense that needs to be recorded even if cash has not been exchanged yet. At the same time, crediting interest payable establishes a liability that indicates the obligation to pay the accrued amount in the future. This aligns with the accrual basis of accounting, which dictates that expenses must be recorded in the period in which they are incurred, regardless of when the cash payment occurs.

By reflecting this interest expense and payable, the financial statements provide a more accurate representation of a company's financial position as of the reporting date. This ensures that the expenses and liabilities are properly recognized, adhering to the matching principle in accounting, which aims to match revenues with the expenses incurred to generate those revenues.