With paid in kind interest, the interest is accrued or rolled up onto the balance of the loan This means that no interest is paid during the life of the loan, it's all paid at the end. When the debt is repaid, we then pay this big lump of interest as well Let's see that happening in an example Here we've got a debt schedule and in year 1 we take out some debt at the beginning of the year of 100 We need to pay interest of 5%, so my pick interest accrual is 5 But that is not actually paid. So at the end of the year the amount of debt I now owe is 105 The initial 100 plus the 5 of interest Now a similar thing happens in year 2, you start with 105 and again you have pick interest of 5% But that 5% is on the new opening balance of 105 So your pick interest actually goes up to 5.3 Now your ending balance is 110.3, being the 105 you started with plus the extra 5.3 of interest in year 2 A similar thing happens in year 3, the interest goes up again and in year 4 The life of this loan is 4 years, so we start year 4 with 115.8 We add on a 5% pick interest, so 5.8 And then we make a repayment and the repayment has to be the size of the debt plus all of the interest So we can see the interest gets larger with time via compounding and the repayment includes both the initial principal and the interest How's that presented in the balance sheet? Well at the end of year 1, you've got long term debt owed of 105 At the end of year 2 you've got long debt owed now of 110.3 But at the end of year 3 you've now got only one year left of the debt So your long term debt moves out of long term debt and moves into current portion of long term debt That's now a current liability. The amount owed now is 115.8 And at the end of year 4, you've fully paid off the debt so your balance is now zero So that's how the pick is presented on the balance sheet How is it recorded when it's initially taken out? Well when we first take it out we get some cash, so my cash goes up, that's one of my assets But my liabilities also go up as well by the debt, so in this case I'd have cash up 100 and debt up 100 As we incur or accrue the interest expense, that has to be recorded as well Interest expense goes to be income statement which reduces my net income, which reduces my retained earnings As my retained earnings goes down, my debt or liability goes up So liability up, equity down