Journal Entry for Interest Earn but Not Received

Interest income is money received from borrower for the use of borrowed capital over a specific period of time. The interest income is usually fixed based on the interest rate and principle which is detailed in the term and conditions.

When company provides a loan to the borrower, they expect to generate a return on the cash provided. The return from the loan is fixed as the interest income. The return from the equity investment is informed of profit or dividend.

Interest income also can earn by depositing cash into the bank such as term deposits and saving accounts. The bank will provide interest income to individuals and companies who keep the cash in the bank. They must follow the bank rule and policy which include interest rates and terms.

Based on accounting rules, revenue and expense must be recognized by using accrue basic. Expense is recorded based on insurance rather than a cash payout. Revenue is recorded when it earns rather than cash receive. The same as other types of income, interest income must record on an accrued basis. So it may be earned but the cash has not yet been received.

The interest income is calculated based on the rate and term. So it is earned when the loan reaches a month-end period. Monthly Interest income is equal to the monthly interest rate multiplied by the loan principal. So it is recorded at the end of the month and it impacts the income statement and balance sheet. The payment of interest will base on the loan schedule which is different from the reporting date.

Journal Entry for Interest Earn but Not Received

As we know, the interest is earned when the loan period has covered a certain accounting period.

The journal entry is debiting interest receivable and credit interest income.

Account	Debit	Credit
Interest Receivable	XXXX
Interest income		XXXX

The interest receivable will be present as current assets on the balance sheet. The interest income will be present as income on the income statement.

On the payment date, borrower needs to pay the interest amount to the creditor. So accountants need to reverse interest receivable and record cash.

The journal entry is debiting cash and credit interest receivable.

Account	Debit	Credit
Cash	XXXX
Interest Receivable		XXXX

It will increase the cash balance on the balance sheet and reduce the interest receivable.

Journal Entry for Interest Earn but Not Received Example

Company ABC provides a loan to Mr. A amount of $ 100,000 with the interest of 0.5% per month. The loan term starts on 01 July, and Mr. A promises to pay the interest every 3 months. ABC needs to prepare a monthly financial statement every month. Please prepare a journal entry for interest earned but not yet received.

Monthly interest income = $ 100,000 * 0.5% = $ 500 per month

ABC must record interest income at the month-end, even the cash is not yet received. So at the end of the first month (July), company records interest income and interest receivable.

The journal entry is debiting interest receivable $ 500 and credit interest income $ 500.

Account	Debit	Credit
Interest Receivable	500
Interest income		500

At the end of August, the same journal entry is needed to make.

Account	Debit	Credit
Interest Receivable	500
Interest income		500

At the end of September, the same journal entry is made.

Account	Debit	Credit
Interest Receivable	500
Interest income		500

At the same time, it is also the time that Mr. A requires to pay the interest for the three months. It means ABC receive cash for the interest cover from July to September.

The journal entry is debiting cash and credit interest receivable.

Account	Debit	Credit
Cash	1,500
Interest Receivable		1,500