Interest Receivable Journal Entry

Updated on January 2, 2024
Article byWallstreetmojo Team
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

Journal Entries for Interest Receivable

The following Interest receivable journal entry example explains the most common type of situations where the Journal Entry of Interest Receivable is accounted for and how one can record the same. As there are many situations where the Journal Entry of Interest Receivable can be passed, it is not possible to provide all the types of examples.

Some of the most common Journal Entry of Interest Receivable are given below -.

Interest Receivable Journal Entry

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Examples of Interest Receivable Journal Entry

Below are the examples of Interest Receivable Journal Entries.

Example #1

Company X Ltd. deposited a sum of $ 500,000 in the bank account on December 01, 2018. The accounting year of the X ltd. ends on December 31, 2018. The company earned the interest of $ 5,000 for the December month on bank deposit, but the same was received on January 07, 2019. Analyze the treatment of the interest received by the company and pass the necessary journal entries.

Solution:

The date when the interest is received: January 07, 2019

In the present case, company X ltd. earned the interest in one accounting year (ending on December 31, 2018) and received the same in the next accounting year (ending on December 31, 2019). Here, X ltd will recognize the $ 5,000 interest income in financial statements of the year ending 2018 even though the company received the same in the next accounting period because it relates to the current accounting period, i.e., 2018.

The following are the accounting entries for recording interest income receivable in financial statements for the year ending 2018 and the receipt of income in financial statements of the yearFinancial Statements Of The YearFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more ending 2019.

Entry to record the interest incomeRecord The Interest IncomeInterest Income is the amount of revenue generated by interest-yielding investments like certificates of deposit, savings accounts, or other investments & it is reported in the Company’s income statement. read more receivable

For the year ending December 2018

Interest Receivable Example 1-1

For the year ending December 2019Entry to record the receipt of interest income

Interest Receivable Example 1-2

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Example #2

Bank gave the loan on September 30, 2018, to one of its employees, amounting to $200,000, on the condition that the interest rate of 12% would be charged. It was promised by the employee to return the principal amount along with the interest portion after three months, i.e., at the end of the accounting year 2018. However, the principal and interest were not paid by the employee at the end of the year. Therefore, on January 01, 2019, the employee sent a check for the payment of the interest portion of the three months.

Analyze the treatment of the interest received by the company and pass the necessary journal entries in the bank’s books.

Solution:

In the present case, the employee was not able to pay the loan principal amountLoan Principal AmountLoan Principal Amount refers to the amount which is actually given as the loan from the lender of the money to its borrower and it is the amount on which the interest is charged by the lender of the money from the borrower for the use of its money.read more and the interest portion on the due date. The interest portion got accruedInterest Portion Got AccruedAccrued Interest is the unsettled interest amount which is either earned by the company or which is payable by the company within the same accounting period.read more in the accounting year ending in 2018 but was not received. So the bank will recognize its income of interest in the accounting year ending in 2018 and record the receipt of the same in the accounting year in which the income is received.

Calculation of Interest income to be recognized in the accounting year ending in 2018.

Interest Receivable Example 1-3

= Loan amount * interest rate * (number of due months /12)

= $ 200,000 * 12% * (3/12) = $ 6,000

Entry to record the disbursement of loan and interest income receivable

For the year ending December 2018

Interest Receivable Example 2-1
Interest Receivable Example 2-2

For the year ending December 2019, Entry to record the receipt of interest income.

Example 2-3

Example #3

On November 01, 2018, Company Y ltd purchased a 1-year bond for $ 500,000 that pays the interest at 12% interest. The company will collect the principal and interest amounts due at the end of the bond’s term. Pass the necessary journal entries in the books of the company.

Solution:

At the accounting periodThe Accounting PeriodAccounting Period refers to the period in which all financial transactions are recorded and financial statements are prepared. This might be quarterly, semi-annually, or annually, depending on the period for which you want to create the financial statements to be presented to investors so that they can track and compare the company's overall performance.read more ending in 2018, on December 31, 2018, interest has already been accrued for the one month. Therefore, the company can recognize the same in its books of accounts, even if interest has not been received yet.

Calculation of Interest income to be recognized in accounting year ending on 2018

Entries Example 3-1

= Loan amount * interest rate * (number of due months /12)

= $ 500,000 * 12% * (1/12)

= $ 5,000

The journal entry for the year ending December 2018 would be:

entries Example 2-3

The above adjusting journal entry will be required at the end of every period to prepare and present the correct monthly financial statement of the company.

Conclusion

Interest receivable is an amount that the person has earned but has not been received yet. Once the interest income is accrued (becomes receivable), the journal entry should be passed to record when it became due and the date when the payment against the same is received. Then on that date, the receipt entry should be passed into the books of accounts.

The adjusting journal entryAdjusting Journal EntryAdjusting Entries in Journal is a journal entry made by a company at the end of any accounting period on the basis of the accrual concept of accounting. Companies are required to adjust the balances of their various ledger accounts at the end of the accounting period in order to meet the requirements of the various authorities' standards.read more should be passed at the end of every period to prepare and present the correct monthly financial statement of the company to the stakeholders.

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