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What is Accrued Interest Formula?
Accrued interest is that amount of interest which is due for a debt or bond but not paid to the lender of the bond. Interest is accrued in case of a bond because, interest starts accumulating from the time the bond is issued but the interests are generally paid in the form of a coupon in periodical interval like quarterly, semi-annually or annually. So for the period, the interest is accumulated but not paid becomes an accrued interest. The formula of accrued interest calculation is to find out how much is the daily interest and then multiply it by the period for which it is accrued.
Accrued Interest Formula is represented as follows,
Explanation of Accrued Interest Formula
Interest becomes accrued when the interest is payable but not yet paid, because the timing for interest payable and interest paid is different. Interest is accrued in case of a bond because, interest starts accumulating from the time the bond is issued but the interests are generally paid in the form of a coupon in periodical interval like quarterly, semi-annually or annually. So for the period, the interest is accumulated but not paid becomes an accrued interest.
Examples of Accrued Interest Formula (with Excel Template)
Let’s see some simple to advanced examples of Accrued Interest to understand it better.
Accrued Interest Formula – Example#1
Let us understand the formula for calculation of accrued interest of a loan. Suppose the interest charged on a loan is calculated on a daily basis. Let us assume that the yearly rate of interest for the loan is 14% and the amount of loan is $1000. And the loan is payable every month. And the rate of interest charged by the financial institution for the loan is monthly.
Given,
- Loan Amount=$1000
- Yearly Interest rate=14%
- The period for which the interest is accrued= 30 days
Using the above-given information we will do the calculation of Accrued Interest as follows,
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Accrued Interest formula = Loan amount*(yearly interest/365)*30
=$1,000*14%/365*30
Accrued Interest will be –
Accrued Interest in a Month = $11.51
But the loan amount in the form monthly installments is payable by the person who took the loan is monthly. So, in this case, the accrued interest on the loan will in the form of accrual till the point the individual do not pay the monthly installment
Accrued Interest Formula – Example#2
Investment in the public provident fund is a very good practical example to understand the concept of accrued interest. Investors invest in this government scheme in order to save taxes under 80c. The maximum amount to be invested in the scheme is Rs 1, 50,000 in a year. The yearly rate of interest for the amount invested in the public provident fund is around 8%. Suppose someone has a public provident fund account and he has started the account with Rs1, 50,000 as the initial investment.
Following is given data for calculation of Accrued Interest
Therefore, the calculation of Accrued Interest will be as follows
Accrued Interest will be –
Accrued Interest for Year = 12273
The interest payable on the invested amount is calculated on a monthly basis. But the interest paid by the government on the invested amount is yearly. So, in this case, the accrued interest on the investment will in the form of accrual till the point the individual receives the yearly interest. And the interest is payable in the frequency which is yearly and the rate of interest calculated is calculated based on monthly compounding.
Accrued Interest Formula – Example#3
Investment in monthly income scheme is another good practical example to understand the concept of accrued interest. Suppose someone invested Rs 1,00,000 in this scheme. Suppose someone has a monthly income scheme account and he has started the account with Rs1, 00,000 as the investment.
Using the above-given information we will do the calculation of Accrued Interest as follows,
Accrued Interest formula = Loan amount*(yearly interest/365)*30
=100000*0.08/365*30
Accrued Interest will be –
Accrued Interest Monthly = 657.53
So the accrued interest monthly, in this case, is Rs657, which is paid at the end of the month.
The interest payable on the invested amount is calculated on a daily basis. But the interest paid by the government on the invested amount is monthly. So, in this case, the accrued interest on the investment will in the form of accrual till the point the individual receives the monthly interest. The yearly rate of interest for the amount invested in monthly income scheme is around 8%. And the interest is payable in the frequency which is monthly and the rate of interest calculated is calculated based on daily.
Relevance and Use of Accrued Interest Formula
The basis of accrued interest is based on accrual-based accounting. Companies do not wait for the receipt of cash for reporting income or expenses. Income is reported whenever it is accrued. Similarly, a company which has debts in its books will have report the amount of interest accrued for the bonds it has lends. The accrued interest is reported in the balance sheet as interest payable and comes in the current liability section of the balance sheet.
The accrued interest is also reported by the companies in the income statement below the operating items, under the heading interest expenses. For the accrual accounting principle to be followed companies need to maintain the accrued interest portion and report the same in the financial statements during reporting 10Q and 10k.
Recommended Articles
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