In accounting, accrued interest is the amount of interest that has been incurred but not yet paid as of a specific date. This applies to loans or other debt obligations. Accrued interest occurs in t﷽he following ways, reported by both﷽ borrowers and lenders:

• Borrowers list accrued interest as an expense on the income statement and a current liability on the balance sheet.
• Lenders list accrued interest as revenue and a 澳洲幸运5开奖号码历史查询:current asset, respectively.

Read on to learn how to correctly account for accrued interest.

Accrued Interest in Accounting

Entries to the 澳洲幸运5开奖号码历史查询:general ledger for accrued interest, not received interest, usually take the form of adjusting entries offset🌱 by a receivable or payable account. Accrued interest is typically recorded at the end of an accounting period.

Accrued interest accumulates with the passage of time, and it is immaterial to a company's operational productivity during a given period. 

Accrued interest is usually counted as a current asset, for a lender, or a current liability, for a borrower, since it is 澳洲幸运5开奖号码历史查询:expected to be received or paid within one year.

The use of accrued interest is based on the accrual method of accounting, which counts ec🍬onomic activity when it occurs, regardless of the receipt of payment. This method follows the matching principle of accounting, which states that revenues and expenses are recorded when they happen, instead of when payment is received or made.

By contrast to the accrual principle, the 澳洲幸运5开奖号码历史查询:cash accounting principle recognizes an event when cash or c🤡ompensation is received for an event.

Adjusting Entries

Suppose a firm receives a bank loan to expand its business operations. Interest payments are due monthly, starting on Jan. 1. Even though no interest payments are made between mid-December and Dec. 31, the company's December income statement needs to reflect profitability by showing accrued interest as an expense. After all, those funds eventually leave the business.

How to Adjust

In this case, the company creates an adjusting entry by debiting 澳洲幸运5开奖号码历史查询:interest expense and crediting interest payable. The size of the ent🍃ry equals the accrued interest from the date of the loan until Dec. 31.

Typical 澳洲幸运5开奖号码历史查询:adjusting entries include aℱ balance sheet account for interest payable and an income statement 🅰account for interest expense.

Accurate and timely accrued interest accounting is important for lenders and for investors who are trying to predict the future liquidity, solvency, and profitability of a company.

Issued Bonds

Sometimes corporations prepare bonds on one date but delay their issue until a later date. Any investors who purchase the bonds at par are required to pay the issuer accrued interest for the time lapsed. The company assumes the risk until its issue, not the investor, so that portion of the꧟ risk premium is price🐼d into the instrument.

Par Value Only

Keep in mind this only works if investors purchase the bonds at par. The company's 澳洲幸运5开奖号码历史查询:journal entry credits bonds payable for the 澳洲幸运5开奖号码历史查询:par value, credits interest payable for the accrued interest🎉, and offsets those by debiting cash for the sum of par, plus accrued interest.

The Bottom Line

Accounting is a precise science and needs to be done correctly to ensure books balance and accounting principles are met for legal purposes. If you don't have extensive accounting experience, particularly when it comes to debt obligations, seek out professional help to ensure your numbers are correct.