Accrued interest income journal entry

Introduction

In accounting, an interest income is a type of income that is earned through the passage of time, and the accrued interest income is the interest income that we have earned but have not received the cash payment yet. Likewise, we usually need to make the journal entry for the accrued interest income at the period-end adjusting entry if we have any type of receivable that generates the interest over the accounting period.

The journal entry for the accrued interest income at the period-end adjusting entry is made in order to account for the income that we have already earned on the income statement. At the same time, it is also made to recognize and record our right of receiving interest payment in the future date on the balance sheet.

Under the accrual basis of accounting, we need to recognize and record the revenue that is earned regardless of when the cash is received. Likewise, we usually need to record the accrued interest income on any type of receivables at the period-end adjusting entry when the receivable is a long-term one or the maturity of the receivable cross over to the next period of the accounting.

If we do not make the accrued interest income journal entry for the interest that we have already earned, there will an understatement of the total assets on the balance sheet as well as an understatement of the total revenues on the income statement.

Accrued interest income journal entry

We can make the accrued interest income journal entry at the end of the period-end adjusting entry by debiting the interest receivable account and crediting the interest income account.

This accrued interest income journal entry is made to recognize our right to receive the cash in the future on the balance sheet as well as to record the revenue that we have earned for the period on the income statement.

Later, when we receive the cash payment for the accrued interest that we have recorded above, we can make another journal entry to eliminate the interest receivable by debiting the cash account and crediting the interest receivable account.

This journal entry will eliminate the interest receivable that we have recorded previously.

Accrued interest income example

For example, on July 1, we receive a $10,000 promissory note from our customer in exchange for the merchandise goods which have a $10,000 value in the sale. In other words, we receive a $10,000 promissory note, instead of $10,000 cash, for selling the merchandise goods.

The promissory note has a 6-month maturity with a 10% interest in which the customer promise to pay the $10,000 amount with the $500 on January 1 which is at the end of note maturity. And we use the periodic inventory system to manage our merchandise inventory, in which December 31 is our period-end adjusting entry.

In this case, on July 1, when we receive the $10,000 promissory note, we can make the journal entry for the note receivable with the debit of the notes receivable account and the credit of the sales revenue account as below:

July 1:

This journal entry will increase both our total assets on the balance sheet and total revenues on the income statement by $10,000 for the transaction of selling the merchandise goods for the note receivable as of July 1.

Later, on December 31, which is our period-end adjusting entry, we need to make the journal entry for the accrued interest income of $500 ($10,000 x 10% x 6/12) that we have earned for 6 months period on the $10,000 note receivable.

In this case, we can make the journal entry for accrued interest income on December 31 by debiting the $500 to the interest receivable account and crediting the same amount to the interest income as below:

December 31:

If we do not make this journal entry at the period-end adjusting entry of December 31, the total assets on the balance sheet and total revenues on the income statement will be understated by $500 as of December 31.

Then, when the customer honors the promissory note by paying us both the $10,000 principal and the $500 interest of the note on January 1 of the next year, we can make the journal entry as below:

January 1: