Journal Entry for Accrued Interest Income
Interest income is the income received by the company as a result of lending money to the customer. When someone loans money to another party, they typically expect to receive regular payments of interest over the life of the loan.
Interest income can come from a variety of sources, including savings accounts, bonds, and other types of loans. Interest income helps to offset the effects of inflation and provides a source of potential income for the company.
The interest income depends on the interest rate which bases on many other factors such as risk, demand and supply of loans, and so on. For example, interest from loans is typically much higher than interest from saving accounts. As a result, a company will receive interest income and bear the risk of loan default.
For borrowers, interest payments represent a cost of borrowing money that must be factored into their overall financial planning. Whether you are a borrower or a lender, understanding interest income is an important part of effective financial management.
When a company earns interest on its investments, that interest income is recorded on the income statement. This is one of the most important accounts for a company, as it shows how much money the company has earned from the loan and other investments.
The amount of interest that accrues on a loan is dependent on a number of factors, including the interest rate, the length of the loan, and the frequency of payments. The interest rate is the most important factor, as it determines how much interest will be charged on the outstanding balance. The length of the loan also affects the amount of interest that will accrue. The longer loans typically have higher interest rates than shorter loans.
Finally, the frequency of payments can impact the amount of interest that accrues, as more frequent payments reduce the amount of time that interest can accrue. By understanding how these factors affect accrued interest, the lender can make proper accrued interest income to prepare financial statements.
Journal Entry for Accrued Interest Income
The company record accrued interest income based on the calculation. It depends on the interest rate, outstanding loan balance, and coverage period.
After calculation, the company record accrued interest receivable and credit interest income.
| Account | Debit | Credit |
|---|---|---|
| Accrued Interest Receivable | 000 | |
| Interest Income | 000 |
The transaction will increase the accrued interest receivable which is the current assets on the balance sheet. At the same time, it will increase the interest income on the income statement.
When the company receives the cash paid, they need to reverse the accrued interest receivable from the balance sheet.
The journal entry is debiting cash and credit accrued interest receivable.
| Account | Debit | Credit |
|---|---|---|
| Cash | 000 | |
| Accrued Interest Receivable | 000 |
The entry will reverse the accrued interest receivable from balance sheet. The cash will increase on the balance sheet.
Example
Company ABC has lent the money to the customer for $ 100,000 with interest of 2% per month. At the end of the month, the company needs to prepare a monthly financial statement. It needs to include the accrued interest income as well. Please prepare journal entry for accrued interest income.
The company is required to record interest income based on the loan, interest rate, and time coverage. It is required to record accrue before the cash is received from the customer.
The interest income is calculated as follows:
Interest income per month = $ 100,000 * 2% = $ 2,000
The journal entry is debiting accrued interest receivable $ 2,000 and interest income $ 2,000.
| Account | Debit | Credit |
|---|---|---|
| Accrued Interest Receivable | 2,000 | |
| Interest Income | 2,000 |
It will increase the interest receivable amount $ 2,000 and interest income for the same amount.
When the customer makes a payment regarding to the interest, the company will record cash received and reverse the interest receivable.
The journal entry is debiting cash $ 2,000 and credit accrued interest receivable $ 2,000.
| Account | Debit | Credit |
|---|---|---|
| Cash | 2,000 | |
| Accrued Interest Receivable | 2,000 |