Accrued interest is the amount of interest that has been incurred, but not paid. This could be on the specific date of a loan or other financial obligation. It can be as an accrued revenue to the lender or accrued interest expense for the borrower. In simple terms, the amount to be paid as accrued interest is the accumulated interest to be paid as of the end date of an Accounting period.
Accrued interest may also refer to the accumulated bond interest from the time of the previous payment made. It is a feature of Accrual Accounting. It follows a pattern of the guidelines of the revenue recognition and matching principles of accounting.
It is important to note that accrued interest is always booked at the end of an accounting period as an adjusting journal entry. This reverses on the first day of the following period.
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Raj has a Rs. 10,000 loan amount that he is yet to receive. This amount has a 10% interest rate for which the payment has been received on the 20th day of the month. The 20th day of the month is the monthly interest payment day. The remaining 10 days, 21st to 31st for the month of May is an accrual of 11 days of interest.
The record of the accrued interest for Raj is as follows:
10%* (11/365)* Rs. 10,000= Rs. 45.20
The amount of accrued interest for those on the receiving end is a credit to the interest revenue account and debit to the interest receivable account. The amount receivable is rolled to the Balance Sheet and is classified as a short-term asset.