What is Accrued Interest?
1072 reads · Last updated: December 5, 2024
In accounting, accrued interest refers to the amount of interest that has been incurred, as of a specific date, on a loan or other financial obligation but has not yet been paid out. Accrued interest can either be in the form of accrued interest revenue, for the lender, or accrued interest expense, for the borrower.The term accrued interest also refers to the amount of bond interest that has accumulated since the last time a bond interest payment was made.
Definition
In accounting, accrued interest refers to the amount of interest on a loan or other financial obligation that has been incurred but not yet paid by a specific date. Accrued interest can be the interest income for the borrower or the interest expense for the lender. It also refers to the accumulated bond interest since the last payment.
Origin
The concept of accrued interest originates from the accrual accounting principle, which requires that income and expenses be recognized when they occur, not when cash is actually exchanged. This principle helps businesses more accurately reflect their financial position and performance.
Categories and Features
Accrued interest is mainly divided into accrued interest income and accrued interest expense. Accrued interest income refers to the interest that the borrower should pay but has not yet paid, while accrued interest expense refers to the interest that the lender should receive but has not yet received. The feature of accrued interest is that it reflects the true financial status of a business in financial statements, even though the cash flow has not yet occurred.
Case Studies
Case 1: Suppose Company A lends $1,000,000 on January 1, 2024, at an annual interest rate of 5%, with interest paid semi-annually. By June 30, 2024, Company A should recognize accrued interest income of $25,000 ($1,000,000 x 5% / 2). Case 2: Company B issues a bond with an annual interest rate of 6%, with interest paid annually. By December 31, 2024, Company B should recognize accrued interest expense of $60,000 (bond face value x 6%).
Common Issues
Common issues investors face include accurately calculating accrued interest and correctly reflecting it in financial statements. A common misconception is that accrued interest is the same as paid interest, whereas it is actually the portion that has been incurred but not yet paid.
