Interest Earned

Interest earned is the income that a business or individual receives, or becomes entitled to, in return for letting someone else use their money. It arises on bank deposits, certificates of deposit, money market accounts, loans made to others, notes receivable, bonds and other debt investments, and on overdue customer balances where interest is charged. In the accounts it is recorded in a revenue or income account, often titled interest income, interest revenue or interest earned.

For most businesses interest earned is a non-operating item, because lending money is not their main activity, so it is reported in "other income" below operating income. For banks and other lenders, by contrast, interest earned on loans and securities is their main source of revenue, and the difference between interest earned and interest paid on deposits is measured by the net interest margin.

For simple interest, the standard formula is:

Here $I$ is the interest earned, $P$ is the principal, or amount lent or deposited, $r$ is the annual interest rate as a decimal, and $t$ is the time in years. A business that lends $50,000 to a supplier at 6 percent for nine months earns $50,000 times 0.06 times 0.75, which equals $2,250. Where interest is compounded, interest earned in each period is added to the principal and itself earns interest, as explained in the entry on compound interest; savings products usually quote the effect as an annual percentage yield.

Under accrual accounting, interest is recognized as it is earned over time, not when the cash arrives. If a period ends between interest payment dates, the business records the interest earned to date by debiting interest receivable and crediting interest income, an example of accrued revenue.

For example, on 1 November a company invests $200,000 in a six-month note paying 4.8 percent a year, with all interest paid at maturity on 30 April. At its 31 December year end, two months of interest have been earned: $200,000 times 0.048 times 2/12, or $1,600. It records a $1,600 interest receivable and $1,600 of interest income. On 30 April it receives $204,800, which is the principal plus $4,800 of interest, and records the $3,200 earned in the new year as interest income while clearing the $1,600 receivable. For bonds and notes bought at a premium or discount, interest income is measured using the effective interest method, so it reflects the yield at purchase rather than just the coupon received.

On the income statement, non-financial companies usually show interest income separately or net it with interest expense in a line such as "interest expense, net," with details in the notes. On the cash flow statement prepared under US GAAP, interest received is classified as an operating cash flow, while IFRS has allowed a choice between operating and investing; IFRS 18, effective from 2027, generally classifies it as investing for most companies.

Analysts look at interest earned for clues about a company's cash balances and treasury policy. A large cash pile earning little interest can suggest an opportunity to return money to shareholders, while unusually high interest income may indicate riskier investments. Rising interest rates since 2022 have lifted interest earned substantially for cash-rich companies.

In the United States, interest earned is generally taxable as ordinary income for both individuals and businesses. Banks and other payers issue Form 1099-INT to recipients who earn at least $10 of interest in a year. Interest on most state and municipal bonds is exempt from federal income tax, and interest on US Treasury securities is exempt from state and local income tax, which makes such securities attractive sources of tax-exempt income for investors in high tax brackets. Interest credited to an account is taxable in the year it is credited even if it is not withdrawn.