Accrued interest is the amount of interest that has been earned by an investment that has yet to be paid out. Recording accrued interest is an important part of financial record-keeping for both businesses and individuals alike. Accrued interest is often recorded in the form of a journal entry in the company’s general ledger. It is important to keep track of accrued interest on a regular basis to ensure accuracy and transparency of financial records. Accurately recording accrued interest can help a business or individual remain in compliance with applicable tax laws and regulations. In addition, it can improve the accuracy of financial statements and provide a clearer picture of the financial health of a business or individual. In this blog post, we will discuss the steps and considerations that should be taken when recording accrued interest. We will cover the importance of keeping accurate records of accrued interest, the types of journal entries used to record accrued interest, and the possible consequences of failing to properly record accrued interest.
Adjusting Entry Example: Accrued Interest Expense
Why is understanding accrued interest important?
Both borrowers and lenders should be aware of accrued interest because the financial relationship between these parties can be advantageous to both parties. As a borrower, this partnership may be advantageous to you because you can get access to more funds that will boost your success and that of your company. As a lender, you gain from this alliance because of the interest you get up until your borrowers pay off all of their outstanding loans.
However, for these partnerships to be successful, it’s crucial for both parties to comprehend how the process works and how various percentages may affect the interest paid. For instance, paying more over time when compared to a lower interest rate is the result of a higher interest rate. Additionally, in order to ensure that they pay their debts in a timely manner, borrowers must understand how to accurately record accrued interest statements. You may be able to stick to a schedule and record your accumulated interest by using an organizational system, such as a financial bookkeeping system.
What is accrued interest?
The amount of interest that has accrued on debts over specific time periods is measured in dollars. This phrase specifically refers to the time frame during which a debt owner has not yet made the required payment to the person or business that lent them the money. This idea is frequently used in accounting procedures and concentrates on increases in interest amounts over financial reporting periods. Additionally, accrued interest may be applied to larger debts, such as bond debts used to finance the construction of a new airport or school.
It’s crucial to keep in mind that accrued interest highlights interest that hasn’t yet been paid when looking at the total. Therefore, it’s crucial to take out any paid interest you may have and stop including it in your calculations when thinking about accrued interest. Typically, borrowers and lenders might examine these numbers quarterly. However, you may also choose to examine yours more frequently.
How to record accrued interest
Depending on your status, such as whether you’re a borrower or lender, the procedure for recording accrued interest may change. Here are two steps to help you navigate both scenarios:
1. Debit your interest expense or accrued interest receivable account
You can debit your interest expense account and enter the value in your financial records if you are a loan borrower. This makes it easier to prove how much interest has accrued and needs to be paid. To show the amount of current outstanding interest that is anticipated to be paid, you can debit your accrued interest receivable account if you are a loan lender. This is helpful for monitoring the amount of interest earned across various accounts.
2. Credit your accrued interest payable or interest revenue account
You can credit your accrued interest payable account once you start repaying your debt as a borrower to keep track of the interest you’ve paid. By doing this, you’ll be able to keep track of each loan payment you make until the debt is paid in full. Meanwhile, financial lenders can credit their interest revenue accounts. The revenue amounts from various outstanding loans can be recorded using these accounts.
How do you calculate accrued interest?
It’s crucial to first gather some crucial data if you’re interested in learning how to calculate accrued interest. This information could consist of the loan amount, the time period for which you want to calculate accrued interest, and the percentage interest rate of the debt. You can use the following formula to calculate your accrued interest amount using this information:
Accrued interest is calculated as follows: loan amount X [interest rate X (time period 365)]
Here is a guide if you’re unsure of what operations to perform in what order when solving this formula:
Examples for calculating accrued interest
Here are some examples you can use as a guide if you intend to calculate accrued interest:
Example one
A local bagel bakery and restaurant called The Brass Bagel has a $20,000 loan with a 6% interest rate. The company wants to know how much interest it has accumulated over the last 90 days. The accrued interest formula is then added to, and the following equation is then solved:
Accrued interest = [0.06 X (90 ÷ 365)] X 20,000
Accrued interest = [0.06 X 0.25] X 20,000
Accrued interest = 0.015 X 20,000
The findings indicate that over the last 90 days, The Brass Bagel has accumulated interest of just under $300.
Example two
K–12 school district River Tech School Corporation has a loan for new facilities worth $11 million with a 5% interest rate. The school corporation is curious to know how much interest it will accrue over the following 60 days. In order to begin solving, add these values to the formula:
Accrued interest = [0.05 X (60 ÷ 365)] X 11,000,000
Accrued interest = [0.05 X 0.16] X 11,000,000
Accrued interest = 0.008 X 11,000,000
The findings indicate that over the following 60 days, the River Tech School Corporation may accrue interest of just over $90,000.
Example three
A store selling gardening and landscaping supplies, Golden Gardening Emporium, has an $80,000 loan with a 4% interest rate. The company wants to know how much interest was charged over a 30-day period. In order to begin solving, add these values to the formula:
Accrued interest = [0.04 X (30 ÷ 365)] X 80,000
Accrued interest = [0.04 X 0.08] X 80,000
Accrued interest = 0.003 X 80,000
The findings reveal that over a 30-day period, Golden Garden Emporium accrues interest of about $260.
FAQ
What is the adjusting entry for accrued interest?
Depending on whether the company is lending or borrowing, accrued interest is either reported on the income statement as a revenue or expense. Additionally, the portion of revenue or expense that has not yet been paid or collected is shown as an asset or liability on the balance sheet.
How do you show accrued interest in accounting?
The borrower’s adjusting entry will credit Accrued Interest Payable (a current liability) and debit Interest Expense. Accrued Interest Receivable, a current asset, will be debited and Interest Revenue (or Income) will be credited in the lender’s adjusting entry.
What is accrued interest with example?
- Accrued interest is reported by borrowers as a current liability on the balance sheet and as an expense on the income statement.
- Lenders list accrued interest as revenue and current asset, respectively.
