Convertible Note - Monthly Interest Accrual
Accruing interest on outstanding convertible notes at the stated rate — even though interest is typically not paid in cash but rather converts to additional equity at the priced round.
| Account Name | Type | Debit ($) | Credit ($) |
|---|---|---|---|
| Interest Expense - Convertible Note | Expense (+) | 1,250.00 | - |
| Accrued Interest Payable - Convertible Note | Liability (+) | - | 1,250.00 |
💡 Accountant's Note
For a $250,000 convertible note at 6% annual interest: monthly accrual = $250,000 × 6% / 12 = $1,250/month. Interest compounds (per the note terms) and increases the total amount that converts to equity at the priced round. The accrued interest is a liability — even though the investor typically doesn't receive cash interest. At conversion, both the principal AND accrued interest convert to equity at the conversion price. Common error: founders forget to accrue interest on convertible notes (especially in QuickBooks) — this understates liabilities and overstates equity.
Practitioner & Systems Framework
💻 ERP Architecture
Set up an auto-recurring monthly journal entry in the accounting system. The Accrued Interest Payable balance grows monthly. At conversion, both the note principal and accrued interest convert — the total converts to shares: (Principal + Accrued Interest) / Conversion Price = Shares Issued. Track the interest accrual by note individually. If multiple notes exist from different investors, each has its own accrual account.
⚠️ Audit Flags
Auditors recalculate interest accrual on each note. Missing interest accruals are a common error in startup financial statements. For audit purposes, the note register must show each note's: principal, interest rate, accrual start date, and cumulative accrued interest. The accrued interest adds to the total conversion amount — auditors verify the cap table conversion calculation includes accrued interest.
📄 Required Documentation
Convertible note register (principal, rate, start date, maturity), monthly interest accrual schedule, accrued interest payable reconciliation, confirmation of accrual method (simple vs. compound).
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