The accrual of interest on a note payable will: A. Reduce total liabilities. B. Increase total liabilities. C. Have no effect upon total liabilities. D. Will have no effect upon the income statement but will affect the balance sheet.

Answer: B. Increase total liabilities.

For EG you have a Note payable in 2 years from now and you have to pay interest every June. If the Note started in January, you will accrue interest every month from January to June until you pay it, so accrued interest is when interest is accumulating before the payment date, so when interest is accrued, the liability interest payable is increasing as you will have to pay it at a later day and thus the accrual of interest increases total liabilities.