Interest Income Journal Entry
Overview
Interest income is a type of income that is earned and accumulated with the passage of time. Likewise, this type of income is usually earned but not yet recorded during the accounting period. Hence, the company needs to account for interest income by properly making journal entry at the end of the period.
The journal entry at the end of the period is necessary for the company to recognize the revenue that it has already earned. Likewise, the total income and assets will be understated in the financial statements if no necessary adjusting entry is made for the interest income.
The interest income journal entry will increase both the income and assets in the income statement and the balance sheet respectively. Hence, making this journal entry can avoid the understatement of income and assets due to the interest earned.
Interest income journal entry
The company can make the interest income journal entry by debiting the interest receivable account and crediting the interest income account.
| Account | Debit | Credit |
|---|---|---|
| Interest receivable | 000 | |
| Interest income | 000 |
This journal entry is required at the period-end adjusting entry to recognize the interest income earned but not yet recorded during the accounting period. Likewise, if the company doesn’t record the above entry, both total income and total assets will be understated.
When the company receives the interest in the form of cash or bank in the next period, it can make journal entry by debiting cash or bank account and crediting the interest receivable and the interest income of the new period.
| Account | Debit | Credit |
|---|---|---|
| Cash / bank | 000 | |
| Interest receivable | 000 | |
| Interest income | 000 |
This journal entry is made to eliminate the receivable that the company has recorded at the adjusting entry of the previous period. At the same time, it is to record the interest income that the company has earned during the current accounting period.
Example
For example, on June 16, 2020, the company ABC Ltd. make a one-year fixed deposit with the XYZ Bank in the amount of $60,000. The bank will pay a monthly interest of 0.5% per month on the 15th day of each month to the company ABC’s current account.
In this case, in the June 30 adjusting entry, the company needs to account for interest income that has already been earned for 15 days.
So, the company need to make the interest income journal entry with the amount of $150 (60,000 x 0.5%/2) as below:
| Account | Debit | Credit |
|---|---|---|
| Interest receivable | 150 | |
| Interest income | 150 |
This journal entry is to recognize the $150 of interest income that the company has earned from its fixed deposit with XYZ Bank in the month of June 2020. Likewise, if the company doesn’t record the above journal entry in the June 30 adjusting entry, both income and assets will be understated by $150.
On July 15, 2020, when the company receives the interest of $300 (60,000 x 0.5%) from the bank, it can make the journal entry below:
| Account | Debit | Credit |
|---|---|---|
| Bank | 300 | |
| Interest receivable | 150 | |
| Interest income | 150 |
This journal entry will eliminate the $150 of receivable that the company has recorded in the June 30 adjusting entry as well as recognize the 15 days of the interest income that the company has earned in July 2020.
