What is Accrued Interest in Accounting?
Accrued Interest is the interest amount which is earned by the company or which is payable by the company on the debt over one accounting period by the company but the same is not received or paid by the company in the same accounting period.
Explanation
Accrued Interest is the interest on the principal of the loan, or the coupon on a bond that has been accrued but not yet paid. It is accounted in the books as account payables if the Company owes to the bond investors or creditors but is still not transacted and paid.
Company records as a part of the accrual principle of accounting. As per the accrual principle of accounting, expenses are to be considered when they are incurred and not when they are actually paid. Hence, the interest which is to be paid on a future date but is accumulated till now is recorded as an expense and a liability by the Company.
Let us consider an example of accrued interest in a bond to understand this concept:
A bond investor holds a bond of a Company XYZ Inc., which is worth $ 100 and pays coupons semi-annually at an interest rate of 12%. The last coupon was made 2 months back, and he wants to sell the bond to the new investor.
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The new investor will pay him $ 100, and the last two months accrued interest expense is calculated as per below.
= 12%/12 * 2 * 100 = $ 2
Thus, the new investor will pay = 100 + 2 = $ 102 for the bond.
Accounting for Accrued Interest Expense
While accounting for accrued into two sets of accounts is adjusted – the interest expenses account on the profit and loss statement and the accounts payable on the balance sheet.
The interest expense on profit and loss statement is increased by the amount of the interest that is yet to paid by the Company. It is because of the accrual principle of accounting, and the Company has to record any interest accrued but yet to pay.
source: Colgate SEC Filings
The accounts payable on the liabilities side of the balance sheet is added with interest payable as it the expense which is yet to be paid by the Company.
source: Bloom Energy SEC filings
The above entered will be done by the borrower on its profit and loss statement and the balance sheet. The lender will report the interest as revenue on its PnL statement and a current asset as accounts receivables on the balance sheet.
Conclusion
It is an amount that has been accrued but not yet paid over a period due to debt owned or owned by the Company. The interest is accrued from the last payment date till the date of preparation of the accounts if it is not paid and the due date is on a later date. Such an amount is recorded as interest in receivables or payables as the case may be. I.e., if the Company has taken a loan, it will record interest payable, and if given a loan say, to another business, it will record an interest receivable.
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This has been a guide to Accrued Interest in Accounting. Here we discuss its meaning and how to account for accrued interest expense along with practical examples. You may also have a look at these articles below to learn more about Accounting basics –
