A balance sheet provides a complete listing of a company's assets and liabilities. The owner’s equity part of the balance sheet records the amount of value that the business owners or shareholders have in the company. If a firm has to pay interest associated with a business debt account, this figure is also registered on the balance sheet.
1. Add “Interest Payable,” which is the amount of interest the company owes (not yet paid), under “Current Liabilities” on the balance sheet. Reduce owner’s equity to keep the sheet in balance. Like accounts payable, the interest cost that the firm is required to pay is considered a liability.
2. Account for interest already paid by reducing your cash account shown under “Current Assets” on the balance sheet, as well as the owner’s equity figure on the balance sheet. For example, if the current cash account is $5,000 and owner’s equity is $20,000, then the company paid out $1,000 in interest the new cash asset value is $4,000, with $19,000 in owner’s equity.
3. Enter prepaid interest, if applicable, as an asset to the business under “Current Assets.” Prepaid interest is an amount a business pays in advance of the debt repayment date. Like prepaid insurance, it serves as a credit to the business until the actual debt bill comes due. Because the business paid cash for prepaid interest, reduce the cash account under “Current Assets” as well to keep the sheet in balance.