Accrued interest is interest that has been earned or incurred but not yet paid or received by the end of the accounting period. This is particularly relevant for loans, bonds or other interest-bearing financial instruments.
Here are some examples of accrued interest journal entries:
1. Accrued Interest on a Loan Payable
Example 1: Accruing Interest on a Loan
Your company has a loan with an interest rate of 6% per annum. The principal amount is $100,000 and interest is paid semi-annually. By December 31, 2024, you need to earn interest for three months (October to December).
Calculation:
- Interest for three months = $100,000 × 6% × (3/12) = $1,500
Journal Entry on December 31, 2024:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 12-31-2024 | Interest Expense A/c Debit | 1,500 | |
| 12-31-2024 | To Accrued Interest Payable A/c | 1,500 |
Explanation:
- Interest Expense will debited to record the interest cost incurred during the period.
- Accrued Interest Payable will credited to recognize the liability for interest that will be paid in the future.
2. Accrued Interest on a Bond Payable
Example 2: Accruing Interest on Bonds Issued
Your company issued bonds with a face value of $200,000 at an interest rate of 5% per annum. Interest is paid annually on 30th June. On December 31, 2024, you are required to earn six months of interest.
Calculation:
- Interest for six months = $200,000 × 5% × (6/12) = $5,000
Journal Entry on December 31, 2024:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 12-31-2024 | Interest Expense A/c Debit | 5,000 | |
| 12-31-2024 | To Accrued Interest Payable A/c | 5,000 |
Explanation:
- Interest Expense will debited to record the cost of interest for the six-month period.
- Accrued Interest Payable will credited to reflect the obligation to pay this interest in the future.
3. Accrued Interest on a Loan Receivable
Example 3: Accruing Interest on a Loan Given to Another Entity
Your company has loaned $50,000 to another business at an annual interest rate of 4%. Interest is paid semi-annually. By December 31, 2024, you need to earn interest for three months.
Calculation:
- Interest for three months = $50,000 × 4% × (3/12) = $500
Journal Entry on December 31, 2024:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 12-31-2024 | Accrued Interest Receivable A/c Debit | 500 | |
| 12-31-2024 | To Interest Income A/c | 500 |
Explanation:
- Accrued Interest Receivable will debited to record the interest that has been earned but not yet received.
- Interest Income will credited to recognize the income earned during the period.
4. Accrued Interest on a Savings Account
Example 4: Accruing Interest Earned on a Bank Deposit
Your company has a savings account with a balance of $80,000 and an interest rate of 3% per annum. Interest is compounded quarterly, and by December 31, 2024, you must have earned one month’s worth of interest.
Calculation:
- Interest for one month = $80,000 × 3% × (1/12) = $200
Journal Entry on December 31, 2024:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 12-31-2024 | Accrued Interest Receivable A/c Debit | 200 | |
| 12-31-2024 | To Interest Income A/c | 200 |
Explanation:
- Accrued Interest Receivable will debited to account for the interest earned but not yet received.
- Interest Income will credited to record the income earned during the period.
These examples of accrued interest journal entries Financial statements help ensure interest expense or income for a specific period is reflected, even if cash has not yet been paid or received.