Interest Receivable Account

Interest Receivable Account Ledger Account Debtors Profit and Loss Account Bank Accounting
A ledger account credited with interest receivable until received, after which it is moved to the bank and credited to the profit and loss account for the period.
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Interest Receivable Account

An Interest Receivable Account is a ledger account used in accounting to record interest income that has been earned but not yet received. This account plays a crucial role in the accrual accounting method, where revenue is recorded when earned, regardless of when it is actually received.

Examples

  1. Bank Deposits: If you have a fixed deposit in a bank, the bank pays interest on the principal. This interest can be earned but may not be received until the end of a quarter or year.
  2. Loans: If a company lends money to another entity, the interest income might accrue monthly but be payable at the end of each fiscal quarter. Until the payment is received, this interest is recorded in the Interest Receivable Account.

Frequently Asked Questions (FAQs)

What is the purpose of an Interest Receivable Account?

The purpose of an Interest Receivable Account is to track interest income that has been earned but not yet received. This enables accurate financial reporting and ensures that revenues are matched with the periods in which they are earned.

How is the Interest Receivable account settled?

When the interest payment is received, the Interest Receivable Account is debited and the bank account is credited. The earned interest is then transferred to the Profit and Loss Account.

Is Interest Receivable considered an asset?

Yes, the Interest Receivable Account is considered a current asset because it represents money that is owed to the business and will be received within the current accounting period.

  1. Debtors:

    • Definition: In accounting, debtors are individuals or entities that owe money to a business. This is recorded as an asset in the company’s books.

  2. Profit and Loss Account:

    • Definition: Also known as the income statement, this account summarizes the revenues, costs, and expenses incurred during a specific period of time.

  3. Accrual Accounting:

    • Definition: An accounting method where revenue and expenses are recorded when they are earned or incurred, not when the cash is exchanged.

Online Resources

  • Investopedia - Interest Receivable: Visit
  • AccountingTools - Interest Receivable: Visit
  • The Balance - Understanding Accrued Interest: Visit

Suggested Books for Further Studies

  • “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield: A comprehensive guide on accounting principles, including detailed discussion on accounts receivable.
  • “Financial Accounting” by Walter T. Harrison Jr., Charles T. Horngren, C. William Thomas: Offers a deep dive into financial accounting principles, including topics on interest receivable.
  • “Accounting Made Simple: Accounting Explained in 100 Pages or Less” by Mike Piper: Provides an easy-to-understand introduction to accounting, covering key topics like interest receivable.

Accounting Basics: “Interest Receivable Account” Fundamentals Quiz

### Which account type does the Interest Receivable Account fall under? - [ ] Liability - [x] Asset - [ ] Equity - [ ] Expense > **Explanation:** The Interest Receivable Account is classified as an asset because it represents money that is owed to the company and will be received in the near future. ### When is interest income recorded in the Interest Receivable Account? - [x] When it is earned but not yet received - [ ] When it is received - [ ] When the loan is issued - [ ] At the end of the fiscal year > **Explanation:** Interest income is recorded in the Interest Receivable Account when it is earned, irrespective of when the cash is actually received. ### What happens to the Interest Receivable Account when the interest is received? - [ ] It remains unchanged. - [x] It is debited. - [ ] It is credited. - [ ] It is closed. > **Explanation:** When the interest is received, the Interest Receivable Account is debited, reducing its balance. ### How does the Interest Receivable Account affect the Profit and Loss Account? - [x] It contributes to the revenue in the period it is earned. - [ ] It contributes to the expenses. - [ ] It does not affect it. - [ ] It is recorded as a liability. > **Explanation:** The interest recorded in the Interest Receivable Account is eventually transferred to the Profit and Loss Account, affecting the revenue for the period it is earned. ### Are transactions in the Interest Receivable Account considered part of accrual accounting? - [x] Yes - [ ] No - [ ] Only in cash-based accounting - [ ] Sometimes > **Explanation:** Transactions in the Interest Receivable Account are a fundamental part of accrual accounting, where revenues are recorded when earned, not when received. ### What type of businesses would typically use an Interest Receivable Account? - [ ] Only retail businesses - [ ] Only service-based businesses - [x] Any business that earns interest income - [ ] Non-profit organizations only > **Explanation:** Any business that earns interest income would use an Interest Receivable Account to properly account for earned interest before it is received. ### What must happen for an amount in the Interest Receivable Account to be recorded in the bank account? - [ ] It must be invoiced. - [x] The interest must be received. - [ ] It must be written off. - [ ] It must be accrued again. > **Explanation:** For the amount in the Interest Receivable Account to be recorded in the bank account, the interest must actually be received. ### How frequently are entries made to the Interest Receivable Account? - [ ] Annually - [ ] Daily - [ ] Monthly - [x] Periodically, as interest is earned > **Explanation:** Entries to the Interest Receivable Account are made periodically, typically when interest is earned according to the terms of the financial arrangements. ### What signifies the end use of the Interest Receivable Account for a particular interest? - [x] The receipt of the interest payment - [ ] The closing of the fiscal year - [ ] The issuance of an invoice - [ ] Expiration of the loan term > **Explanation:** The end use of the Interest Receivable Account for a particular interest is marked by the receipt of the interest payment, after which the amount is transferred to the bank and ultimately the Profit and Loss Account. ### In accrual accounting, when is revenue recognized? - [ ] When the cash is received - [x] When it is earned - [ ] At the end of the fiscal year - [ ] When expenses are paid > **Explanation:** In accrual accounting, revenue is recognized when it is earned, irrespective of the actual cash receipt.

Thank you for exploring the fundamentals of the Interest Receivable Account and testing your knowledge with our quiz. Happy accounting!

Tuesday, August 6, 2024
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Bad Debts Recovered January 1, 1
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Impersonal Account January 1, 1
Ledger Account January 1, 1
P & L Account January 1, 1
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