Definition§
Accrued Interest: Accrued interest, also known as accrued income, refers to the amount of interest or other types of income that has been earned but not yet paid. In accounting, it is recorded to reflect the earned financial returns that are due to be received in the future. This concept applies to various entities, including individuals, corporations, and financial institutions, and it ensures that income is recognized in the period it is earned rather than when it is received.
Examples§
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Bond Investments: An investor holds a bond that pays interest bi-annually. If the next payment is due in three months but interest has accumulated for three out of the six months since the last payment, the accrued interest earned thus far is recorded on the financial statements.
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Bank Accounts: A savings account generates interest monthly. If the interest is not yet paid into the account at month-end, it is recognized as accrued interest income.
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Loans Issued: A company issues a loan to a customer that pays interest at an annual rate, but the payment is received quarterly. At the month-end, accrued interest from the beginning of the quarter to the reporting date is recorded as income even though the cash hasn’t been received yet.
Frequently Asked Questions§
What is the difference between accrued interest and deferred income?§
Accrued interest refers to income that has been earned but not yet received, while deferred income refers to income that has been received in advance for services or products to be delivered in the future.
How is accrued interest recorded on financial statements?§
Accrued interest is recorded as interest receivable or accrued income on the balance sheet under current assets, and it is also recognized as interest income in the income statement.
Why is recognizing accrued interest important?§
Recognizing accrued interest is important because it follows the accounting principle of matching revenue with the period in which it is earned, providing a more accurate financial picture of the entity’s performance and condition.
Are there any tax implications for accrued interest?§
Yes, accrued interest may have tax implications. For example, individuals and businesses may need to report accrued interest as income for tax purposes, depending on the local tax regulations.
Related Terms§
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Accrual Basis Accounting: An accounting method where revenue and expenses are recorded when they are earned or incurred, regardless of when the cash transactions occur.
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Interest Receivable: An asset account that represents interest income that has been earned but not yet received.
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Income Recognition Principle: An accounting principle that outlines when income should be recognized in the financial statements, usually when it is earned and realizable.
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Deferred Income: Income that has been received but not yet earned and therefore is not recognized as revenue until the services or products are delivered.
Online References§
Suggested Books for Further Studies§
- “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield
- “Accounting Principles” by Jerry J. Weygandt, Paul D. Kimmel, and Donald E. Kieso
- “Financial Accounting” by Robert Libby, Patricia A. Libby, and Frank Hodge
Fundamentals of Accrued Interest: Accounting Basics Quiz§
Thank you for exploring the comprehensive details of accrued interest and testing your understanding with this quiz. Continue to develop your accounting acumen for enhanced financial decision-making!
