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Accrued Liability

The periodic (e.g., monthly) interest payable is accrued in the accrued liability account. Accrued liability has both short term and long term balances.

The initial entry generated by the application to record periodic interest expense is as follows:

Dr. Interest Expense/Finance charges
	Cr. Accrued Liability

The balance on the Accrued liability will reflect the interest charges that are payable at the end of the period (month).

Once the payment has been made, the application generates the following entry to clear the interest payable amount sitting in the accrued liability account:

Dr. Accrued Liability
	Cr. Cash

For example, on April 01 2015, ABCD Inc. entered into an agreement to lease a machine for forty months and the lessor includes a finance cost of 5.92% per annum, compounded monthly. The lease has monthly payments of $26,500, payable in arrears. The lease has been classified as finance lease by ABCD inc. under both the current and the new standards.

To record the interest expense for the month of April 2015, ABCD will record the following entries:

Dr. Interest Expense/Finance charges		$4,735
	Cr. Accrued Liability		$4,735

To record the rental payment $26,500 in the following month, which consists of $4,735 as interest expense and $21,765 as principal repayment, ABCD will record the following entries:

Dr. Accrued Liability		$4,735
Dr. Principal Liability		$21,765
	Cr. Cash		$26,500

See also:

Principal Liability