What is the correct entry to record interest expense on a short-term loan?

The entry to record interest expense on a short-term loan involves recognizing the cost associated with using borrowed funds. When a business incurs interest expense, it is an obligation that needs to be documented in its financial records.

Debiting Interest Expense reflects that the company has incurred a cost, which will decrease net income on the income statement. This is fundamental to the matching principle in accounting, where expenses are recognized in the same period as the revenues they help generate.

Crediting Interest Payable indicates that the company has a liability to pay that interest in the future; this entry acknowledges that while the expense has been incurred, the payment has not yet been made. This treatment ensures that both the expense recognized and the corresponding liability are properly accounted for, providing a full picture of the company's financial obligations.

Using this entry helps maintain accurate records, reflecting both the expense and future payment obligation without affecting cash flow at the moment of recording. This practice is essential for maintaining accurate financial statements and for making informed financial decisions.