Interest Income

What is Interest Income?

Interest Income is the revenue earned by lending money to other entities and the term is usually found in the company’s income statement to report the interest earned on the cash held in the savings account, certificates of deposits or other investments.

Since this interest is not a part of the original investment, it is separately recorded. It is obtained by multiplying the principal amount by the interest rate for the period the money was lent.

Example

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For eg:
Source: Interest Income (wallstreetmojo.com)

Let us take an example of Bank of America. Revenue for a bank is different from the revenue of a non-financial company. Revenue for a bank comprises of net interest incomeNet Interest IncomeNet Interest Margin is a popular profitability ratio used by banks which helps them determine the success of firms in investing in comparison to the expenses on the same investments. It is calculated as Investment income minus interest expenses (this step is referred to as netting) divided by the average earning assets.read more and net non-interest incomeNon-interest IncomeNon-Interest Income is the amount of revenue generated by a bank or other financial institution through non-core activities such as late payment fees, loan processing charges, and penalties, among others.read more.

  • For Bank of America, the total interest earned for the period was $57.5 billion.
  • And the net interest income (total interest minus total interest expense) was $ 44.6 billion.

Types of Interest Income

There are two types – – Income from Operations and Other Income

Interest Income Types

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For eg:
Source: Interest Income (wallstreetmojo.com)

#1 – Income from Operations

Interest Income - Operations

source: Bank of America SEC Filings

In cases where the company’s income statement shows Income from Operations and Other Income separately, then the types of InterestThe Types Of InterestFixed interest, variable interest, annual percentage rate, prime interest rate, discounted interest rate, simple interest, and compound interest are the most common types of interest.read more Income depends upon the primary operations of the business. If the business is primarily making income from the interests like for lending companies and financial institutions, then this is taken as Income from Operations. As we note from the example above, Bank of America’s core income is from “Interest.”

#2 – Non-Operating Income (Other Income)

Non Operating IC

source: Starbucks SEC Filings

If the core income does not come from interest, then it is non-operating interest income and comes under other income.

All individuals, as well as organizations, have financial assetsFinancial AssetsFinancial assets are investment assets whose value derives from a contractual claim on what they represent. These are liquid assets because the economic resources or ownership can be converted into a valuable asset such as cash.read more from which they earn a variety of interests. The interest earned on these investments over a period of time is taken as an income for the organization.

In most cases, the interest earned by the individual or the organization is reported in the income statement under Income from Operations or Other Income. The Internal Revenue System (IRS) has made it mandatory that this interest must be reported as taxable income.

Interest Income Accounting

How does Interest Income Works? (Individuals vs. Banks)

Interest Income Video

This article has been a guide to Interest Income. Here we discuss types of interest income – operating and non operating (other income). Also, we discuss interest income accounting along with practical examples. You may learn more about basic accounting from the following articles –

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