Interest income: Definition, Explanation, Journal Entries and Example

What is interest income?

Interest comes that record in the income statement referred to non-operating income or other income that entities earned during the periods of time from their investment.

Investment here included short-term deposit, long-term or fixed deposit, saving account, due credit charged to customers, and similar kinds.

For example, the company might have an excess of funds that they earn from the operations and they might decide to invest that excess of funds to earn some more money by making a short-term or long-term deposit. The company will earn interest income from that investment.

In the income statement, interest income is recorded separately from the operating income if the income statement that the company uses is a multiple-step income statement. But if it uses a single-step income statement, it is recorded in the revenue section.

The entity normally uses the accrual principle to record interest income, and the amount shown represents both the collected amount and the accrual amount.

This applies to the trading or other kinds of company that its business model is not a financial institution. If the company is a financial institution, the interest income is the main income and it should be recorded in the income statement under the operating section.

Interest income journal entry:

Interest income journal entry is crediting the interest income under the income account in the income statement and debiting the interest receivable account in the balance sheet account.

This entry records when the company recognizes interest income. It is an increase in credit like other kinds of income.

Here are the entries when the interest income is recognized. The effect statements are the income statement and balance sheet:

Cr	Interest income	XXXX
Dr	Interest receivable		XXXX

As you can see, we credit the interest income to the income account like other income. And we also debit to interest receivable like others receivable or assets account.

Since this is the journal entry when the company recognizes interest income while the payment is not received yet.

So, How to record when interest income is received?

Well,

It is the same as the recording of collecting other kinds of receivables. The recording is,

Dr	Cash	XXXX
Cr	Interest receivable		XXXX

This entry derecognizes the interest receivable in the balance sheet and recognizes cash or bank that entity receives the payment of interest.

Explanation:

Interest incomes here do not represent the total interest income that the entity received during the period. It is the amount that the entity should earn and record in the income statement during the period. If part of the amount is received, the remaining are recorded in the balance sheet as receivable.

However, not all of the interest incomes are due within 12 months. In some situations, the term and conditions in the contract required interest to be paid for more than 12 months.

In this case, for the amount that is expected to receive more than 12 months, the entity should record in the balance sheet in non-current assets sections.

In case the entity received the entire amount during the year, then there should be no remaining balance records on the balance sheet.

Example:

For example, the entity has a long-term deposit of the excess amount of cash into the bank with an interest rate of 12% annually. The principal amount is 500,000 USD. The interest income that the entity earned is 60,000USD.

During the year, the entity received 30,000 from the bank. The remaining amounts are unpaid at the end of the year and are expected to be paid within 12 months.

Based on this information, the entity should record an interest income amount of 60,000USD in its income statement, and the remaining amount of 30,000 USD should be recorded as interest receivable in the balance sheet under the current assets section.

Here is the entry:

Cr	Interest income	60,000
Dr	Interest receivable		60,000

The total interest income of USD60,000 is recognized during the year. Since the entity receives only USD30,000; therefore, USD30,000 remains as receivable in the balance sheet.