SImple journal entry question (Interest Expense)

[aidanslim]

I am doing a bank reconciliation and I need to do make a journal entry for the following transaction.

Interest Payment (Interest only) on Bank Line of Credit $ xxx (Auto-charge, Monthly Recurring Charge until paid in full)

Can I just do

1) Dr. Interest Expense & Cr. Checking Account?

or

2) Dr. Interest Expense
Cr. Interest Payable
Dr. Interest Payable
Cr. Checking Account

Can anyone explain the difference between 1 and 2? Thank you.

 

[Counterofbeans]

Did you cut a check prior to (or on) month end or not?

Since you are working on a bank rec, I'm guessing you did. As such, Dr Interest Expense and Cr Cash.

Putting into and then immediately removing it from the payable account doesn't do anything.

 

[Samir]

The only benefit of using method two is if you want to take the expense in a certain month versus when it is taken from the bank account.

For example, if the transaction hits the bank account near the end of the month, it may end up clearing the bank the next month:

Transaction hit bank at 5-31-2014, but cleared on 6-2-2014.

In this scenario, your expense would be taken on 6-2-2014. But when this month's transaction hits the bank on 6-30-2014, it will clear on the same day. When it does, you'll have two expenses in one month, and none in the previous month.

If you use the 2nd method to book the expenses, you can put in the first part of the transaction (Dr Int Exp and Cr Int AP) on 5-31-2014. The expense is on the books in this month. When the transaction clears the bank on 6-2-2014, then you enter in the other half of the transaction.

The other advantage to method two is that your balance sheet will be more accurate while money is in transit. So if you generated a balance sheet on 5-31-2014 using method one, the liability of the interest wouldn't be there versus method two, which would show it.