What is Interest Payable?

When a firm borrows money, it has to pay interest. Interest is the return to the lender for the service of having lent money and the associated risk. The level of interest payable is therefore the total amount of interest the firm has to pay on all its borrowings, whether short-term or long-term.


The amount of interest payable will depend on how much money the firm has borrowed, and for how long it has borrowed it. The rate of interest will vary according to the level of risk (the higher the risk the higher the rate of interest) and the length of time the money is borrowed for (short-term, unpredictable borrowing such as overdrafts will command higher rates of interest).
Interest payable is usually subtracted from the operating profit to give the profit on ordinary activities before taxation. It is not considered to be a part of the trading profit, as this measures the profit the firm has made on its mainstream activity of selling its product or service.