Accounting Tutorials
- Income Statement
- Income Statement | Top Examples | Template | Format | Analysis
- Income Statement Basics
- Income Statement Examples
- Income Statement Formats
- Income Statement Template
- Income Statement Formula
- Multi Step Income Statement
- Profit and Loss Statement Template
- Profit And Loss Statement Format
- Book Profit
- Contribution Margin Income Statement
- Sales Revenue
- Net Sales Formula
- Variable Costing Income Statement
- Pro Forma Income Statement
- Purpose of Income Statement
- Income from Operations Formula
- Cost of Goods Sold
- Cost of Goods Manufactured (COGM)
- COGS Formula
- Cost of Goods Sold Examples
- Cost of Sales Formula
- SG&A Expenses (Selling, General & Administrative)
- Interest Expense Formula
- List of Operating Expenses
- Non Operating Income
- Pretax Income (Earnings Before Taxes)
- Income Tax Expense
- Income Tax Accounting
- Earned Income
- Average Total Cost Formula
- Gross Profit
- Gross Profit Formula
- Direct Costs
- Indirect Costs
- Prime Cost
- Duty vs Tariff
- EBITDA
- EBITDA Calculation
- Adjusted EBITDA
- EBIT (Earnings Before Interest and Tax)
- EBIT Calculation
- Net Operating Income
- Operating Income
- Turnover vs Profit
- Operating Profit vs Net Profit
- Net Income Formula
- EBITDA Formula
- Operating Expense (OPEX)
- Operating Expense Examples
- Interest Expense
- LTM EBITDA
- NOPAT
- Non Recurring Items
- EBIT vs EBITDA | Top Differences | Examples | Calculation
- Depreciation – Formula | Types | Most Comprehensive Guide
- Depreciation Expense Formula
- Depreciation Rate
- Straight Line Depreciation Method Formula
- Accumulated Depreciation Formula
- MACRS Depreciation
- Depreciation Tax Shield
- Accelerated Depreciation
- Written Down Value Method
- Depletion Expense
- EBITDA vs Operating Income
- Straight Line Depreciation Method
- Sum of Year Digits Method of Depreciation
- Declining Balance Method of Depreciation
- Land Depreciation
- Double Declining Balance Method
- Amortization of Intangible Assets
- Depreciation vs Amortization
- Unrealized Gains (Losses)
- Non Cash Expense
- Warranty Expense
- Other Expenses
- Accrued Income
- Share based compensation
- Restructuring Cost
- Extraordinary Items
- Interest Income
- Lease Payment
- Financing Costs
- Effective Tax Rate Formula
- Progressive Tax
- Taxable Income Formula
- Completed Contract Method
- Tax Shield Formula
- Double Taxation
- Marginal Tax Rate
- Tax Haven
- Net Loss
- Pro-Forma Earnings
- Margin vs Profit
- Net Operating Loss (NOL)
- Tax Loss Carry Forward
- Tax Loss Harvesting
- Tax Shield
- Sundry Expenses
- Trade Discount
- Trade Discount vs Cash Discount
- Percentage of Completion Method
- Interest vs Dividend | Top 9 Differences (with Infographics)
- EBITDA vs Net Income
- EBIT vs Net Income
- EBIT vs Operating Income
- Above the Line vs Below the Line
- Operating Income vs Net Income
- Cost vs Expense
- Expense vs Expenditure
- Accounting Profit vs Economic Profit
- Income Tax vs Payroll Tax
- Tax credits vs Tax deductions
- Tax Evasion vs Tax Avoidance
- Sales Tax
- Excise Tax
- Indirect Tax
- Direct Tax vs Indirect Tax
- Tax Lien
- Value Added Tax (VAT)
- Ad Valorem Tax
- Estimated Tax
- Proportional Tax
- Tax-Exempt
- Marginal Tax Rate Formula
- Regressive Tax
- Regressive Tax Examples
- Gross Income vs Net Income
- Profit vs Revenue
- Revenue vs Earnings
- Revenue vs Net Income
- Revenue vs Income
- Profit vs Income
- Revenue vs Sales
- Revenue vs Turnover
- Capitalization vs Expensing
- Income Statement vs Balance Sheet | Top 5 Differences You Must Know!
- Statement of Comprehensive Income | Items | Colgate Example
- Variance Analysis
- Other Comprehensive Income
- Partial Income Statement
- Income Summary Account
- FOB Destination
- Explicit Cost
- Implicit Cost
- Direct cost vs Indirect Cost
- Fixed Cost
- Fixed cost vs Variable cost
- Price vs Cost
- Hard Cost vs Soft Cost
- Overhead Costs
- Nopat vs Net Income
- Marginal Costing vs Absorption Costing
- Marginal Cost Formula
- Margin vs Markup
- Markup Formula
- Contribution Margin vs Gross Margin
- Accounting Basics (80+)
- Bookkeeping (52+)
- Balance Sheet (30+)
- Assets (109+)
- Liabilities (68+)
- Shareholders Equity (91+)
- Cash Flow Statement (17+)
- Accounting Careers (27+)
- Accounting Books (8+)
- Budgeting in Finance (31+)
Related Courses
What is Interest Income?
Interest Income is the amount which is allocated as interest received by the company investments. It actually is the revenue earned from the lending money. It is the term which is used by the companies on their income statement to report the interest earned on the cash held in the savings account, certificates of deposits or other investments.
Since this interest was not a part of the original investment it is separately recorded as interest income. This income is obtained by multiplying the principal amount by the interest rate for the time period the money was lent. This amount can be compared to the investments balance for estimating the return on investment (ROI) that business is generating. This revenue is taxable and is recorded in the income section of the income statement.
We can conclude that the excess revenue which is generated from the interest earned on assets is the income from interest
Example
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 is comprised of net interest income and net non-interest income.
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- 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 of Interest Income – Income from Operations and Other Income
#1 – Income from 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 Interest 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)
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 assets from which they earn a variety of interest. The interest which is earned on these investments over a period of time is taken as an income for the organization.
In most of the cases, the interest which is earned by the individual or the organization is reported in the income statement either 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
- With reference to the accrual method of accounting the interest is recorded as it is earned and not necessarily as it is paid by making the assumption that the risk of receiving payment is low. To keep a proper record of accounting for interest a detailed understanding of investment terms and conditions is required. The calculation of this accrued interest is dependent on the interest rate, the compounding period and the investment balance.
- This is amount can be either paid in cash or it may have been accrued as having been earned but not yet paid. In the latter circumstances, this can only be reported if there is a probability of receiving cash and the amount of payment which is to be received can be ascertained. It is obtained from the investments of the entity that pay interests such as savings account or any certificate of deposit.
- It should not be confused or mixed up with dividend as both are different. The dividend is paid to the holders of a company’s common or preferred stock and it signifies the distribution of the issuing company’s retained earnings.
- The penalties paid by the customers on overdue accounts receivable are also treated as income because these payments are related to the use of the company’s funds like accounts receivable by the customer. There are some companies who prefer to mention this type of income as penalty income. This is reported within the interest income account in the general ledger. It is a line item and is generally recorded separately from interest expense in the income statement. This income is taxable as per IRS and the ordinary tax rate is applicable for this income.
- The types of assets which help in earning interest for the bank are varied like mortgages. auto loans, personal loans, and commercial real estate loans.
How does Interest Income Works? (Individuals vs Banks)
Let us take an example to see how it works –
- Suppose a person runs a big sized capital goods business and he has a balance of $10, 50,000 in the company’s savings account. Now it must be understood that this $10, 50,000 is not going to be lying idle in the account until the owner decides to withdraw the entire amount.
- The bank in which the savings account is maintained loans this money to the other people and in returns gets interested in this loan amount. This system is also known as fractional banking. The bank in this situation keeps a small percentage of the actual amount of $10, 50, 000 deposits in its hand
- Now, these loans given by the bank can be of long term or short term. The short-term loans are the overnight loans that are given to other banks. Since the bank is getting money on the person’s deposit the bank then pays an amount as interest to the owner of the deposit so that the owner is motivated to keep the money in the account. So for the entire year, the cash balance is earning interest paid by the bank at the end of each month.
- The bank is required to send out the details giving how much interest it has paid the owner of the deposit in the bank account. Based on this statement the owner of the deposit gets a clear idea of how much taxable interest income he has earned on the financial assets. So the owner’s business gets the interest payment which is recorded in his income statement as income.
Interest Income Video
Recommended Articles
This 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 –
