How do you record PIK interest?

Payment-in-kind (PIK) interest is recorded by recognizing the interest expense on the income statement, even if it is not paid in cash. This interest is often added to the principal balance of the loan or bond, increasing the total liability on the balance sheet. The entry typically involves debiting interest expense and crediting the PIK interest payable or the loan/bond payable account. This practice reflects the accrual accounting principle, where expenses are recorded when incurred, regardless of cash transactions.