On December 31, 2015, interest of $500 is owed on a bank loan that will not be p

Question

On December 31, 2015, interest of $500 is owed on a bank loan that will not be paid until June 30, 2016. What is the neessary adjusting journal entry on December 31, 2015?

A. Debit Interest Expense and credit Cash got $500

B. Debit Interest Expense and credit Interest Payable for $500

C. Debit Interest Payable and credit Interest Expense for $500

D. Debit Interest Receivable and credit Interest Revenue for $500

Explain why the correct answer is correct and why the incorrect answers are incorrect.

Explanation / Answer

The correct answer is option B. because all expensses are debited and all incomes are credited according to the accounting rules.in the given case since we have taken a loan from bank therefore we have to pay interest on it and hence interest becames an expenses for the company and hence it is debited if the interest would have been paid to the bank than cash would have been credited but since the interest is being paid to the bank till 31 dec 2015 so we have to create a liability in our book of accounts with the account name interest payable.since when we create a liability account it has a credit balance so thats why we credit interest payable in the given question.

Now A ooption is incorrect because in A option cash is being credited and as explained above cash is not to be credited because it is not paid to the bank till 31 december 2015.

The option C is incorrect because the credit and debit aspect of the entry have been interchanged as expained above.

The option D is incorrect because as explained in part A interest being paid to the bank is an expense for the company and not an income.

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