Module 3, V10 – INTEREST REVENUE Adjusting Entry Example
Interest revenue versus interest receivable
The following are some distinctions between interest revenue and interest receivable:
Definition
The amount of interest a company has earned through particular transactions, partnerships, and business dealings is represented by both interest revenue and interest receivable amounts, but there are slight variations between the two that can have an impact on a company’s balance sheets. Whether or not a company has received the income, you can still classify any interest income it has received as interest revenue.
In contrast, interest receivable only describes the interest income that a business has not yet received from the client, customer, or debtor who owes it. Instead, its the interest the business expects to receive. If a company anticipates receiving the interest payment within the year, it typically records the interest receivable as a current asset on its balance sheet.
Reporting
Interest revenue and interest receivable are recorded and reported differently by companies. Depending on the accounting procedures used by the business, there are two ways to report interest income.
Even if the person or entity owing the interest hasn’t made payment, the interest revenue will show up on the income statements if the company uses the accrual basis of accounting, which is the most common. Financial experts or business stakeholders can record interest income as long as the company has earned the interest by finishing its portion of a transaction. A company would only record interest revenue under the cash basis of accounting if it had actually received interest payments from those who owed it money.
Any business that consistently generates interest income, which is common for lenders and other financial entities, should record its income at the top of the income statement to allow for accurate alignment of transaction dates. Though it should still be included on the income statement, a company should think about including it under the Other Revenue and Expenses section if it earns interest revenue primarily in other situations and through other methods.
Because you can record interest receivable, or interest you’ve earned but haven’t received, on the corporate balance sheet with the list of current company assets, regardless of your accounting method, recording interest receivable is a simpler process.
The most frequent method is to record interest income and raise the balance of the interest receivable account when recording the two together. Following the customer’s interest payment, a business would enter a second time to reflect the reduction in the balance of the interest receivable account by the sum the customer has already paid. Due to the fact that it includes both paid and unpaid interest income and earnings, the interest revenue accounting sheet does not change.
What is interest revenue?
Interest income shows the amount of interest a business earned over a certain time frame. This is the interest that has been earned on any debts or investments that the company owes to a person or other entity. A company’s income statement lists interest revenue, so whatever period is listed there is also the period from which interest revenue is computed.
Examples of interest revenue
Here are some examples of interest revenue:
Example 1
A business sells manufacturing equipment to large corporations and frequently offers its business clients credit to buy equipment for their warehouses and manufacturing facilities. The business completes its financial statements every quarter to ensure they are accurate and complete and uses the accrual method of accounting.
The company may have received interest income totaling $10,000 in the first quarter of the year, of which $4,000 was paid by its business clients and the remaining $6,000 was unpaid interest. The company would record the entire $10,000 as interest revenue. The company records income it has both earned and received as well as income it has earned but not yet received using the accrual method.
Example 2
A business that employs the accrual method of accounting purchases bonds and earns 3% interest on them, earning $400 at the end of the financial year. Regardless of whether it receives the interest earned, the company records the $400 interest income as an interest revenue credit on the financial statement.
The $400 in interest income would only be recorded, though, if the company uses the cash basis of accounting and receives it by the end of the reporting period. If the funds are not disbursed by then, the $400 in interest revenue won’t be recorded by the company.
Examples of interest receivable
For a better understanding of this area of accounting, consider the following examples of interest receivable:
Example 1
On Dec. 15, a customer enters a store to purchase a $500 holiday present for a relative. The customer applies for credit to buy the gift because the retailer provides low-interest financing of 1% on larger purchases. If the customer pays their bill in full within 30 days, the store offers an additional incentive of 0% interest. However, the customer ultimately needs 45 days to pay their bill, and the merchant assesses a 1% fee. The customers new bill total is $505.
The business can put $5 of interest receivable on its balance sheet before the client visits to pay their bill for the gift. The business records a $5 debit for interest receivable and a $5 credit for interest revenue.
Example 2
A business buys securities and receives interest payments twice a year on April 15 and September 15. 15. The company can record interest that is currently accruing after September 1 on its balance sheet and in the interest receivable section. despite not receiving the payment until April 15,
FAQ
What is an example of interest revenue?
Examples of interest revenue The company may have earned $10,000 in interest income in the first quarter of the year, of which $4,000 was paid by its business customers and the remaining $6,000 was interest that was still owed. The company would record the entire $10,000 as interest revenue.
What type of account is interest revenue?
Although interest receivable is typically viewed as a current asset, there is one exception that allows it to be non-current. Any asset that will generate economic value for or within a year is considered a current asset. The amount of interest that is due but has not yet been paid is known as interest receivable.
Is interest revenue a current asset?
Calculate Interest Revenue To determine interest revenue for the period, multiply the number of months you held the receivables by the monthly interest rate. In this case, multiply 3 by $1,000 to generate interest income of $3,000
What is the formula for interest revenue?
Calculate Interest Revenue To determine interest revenue for the period, multiply the number of months you held the receivables by the monthly interest rate. In this case, multiply 3 by $1,000 to generate interest income of $3,000
