Interest Receivable Account

A ledger account credited with interest receivable until received, after which it is moved to the bank and credited to the profit and loss account for the period.
On this page

Interest Receivable Account

An Interest Receivable Account is a ledger account used in accounting to record interest income that has been earned but not yet received. This account plays a crucial role in the accrual accounting method, where revenue is recorded when earned, regardless of when it is actually received.

Examples

  1. Bank Deposits: If you have a fixed deposit in a bank, the bank pays interest on the principal. This interest can be earned but may not be received until the end of a quarter or year.
  2. Loans: If a company lends money to another entity, the interest income might accrue monthly but be payable at the end of each fiscal quarter. Until the payment is received, this interest is recorded in the Interest Receivable Account.

Frequently Asked Questions (FAQs)

What is the purpose of an Interest Receivable Account?

The purpose of an Interest Receivable Account is to track interest income that has been earned but not yet received. This enables accurate financial reporting and ensures that revenues are matched with the periods in which they are earned.

How is the Interest Receivable account settled?

When the interest payment is received, the Interest Receivable Account is debited and the bank account is credited. The earned interest is then transferred to the Profit and Loss Account.

Is Interest Receivable considered an asset?

Yes, the Interest Receivable Account is considered a current asset because it represents money that is owed to the business and will be received within the current accounting period.

  1. Debtors:

    • Definition: In accounting, debtors are individuals or entities that owe money to a business. This is recorded as an asset in the company’s books.

  2. Profit and Loss Account:

    • Definition: Also known as the income statement, this account summarizes the revenues, costs, and expenses incurred during a specific period of time.

  3. Accrual Accounting:

    • Definition: An accounting method where revenue and expenses are recorded when they are earned or incurred, not when the cash is exchanged.

Online Resources

  • Investopedia - Interest Receivable: Visit
  • AccountingTools - Interest Receivable: Visit
  • The Balance - Understanding Accrued Interest: Visit

Suggested Books for Further Studies

  • “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield: A comprehensive guide on accounting principles, including detailed discussion on accounts receivable.
  • “Financial Accounting” by Walter T. Harrison Jr., Charles T. Horngren, C. William Thomas: Offers a deep dive into financial accounting principles, including topics on interest receivable.
  • “Accounting Made Simple: Accounting Explained in 100 Pages or Less” by Mike Piper: Provides an easy-to-understand introduction to accounting, covering key topics like interest receivable.

Accounting Basics: “Interest Receivable Account” Fundamentals Quiz

Loading quiz…

Thank you for exploring the fundamentals of the Interest Receivable Account and testing your knowledge with our quiz. Happy accounting!

Interest Sensitive Policies
Interest Rate Swap