Interest income is the amount earned for allowing others to use money, whether through bank deposits, loans made, bonds held or customer financing arrangements. It is another name for interest revenues, which covers the accounting in detail. Under the accrual basis, interest income is recognized as time passes, so interest earned but not yet received at the period end is recorded as interest receivable.
How the term is used
For most businesses, interest income is incidental to their main activities and is reported below operating income as nonoperating or other income. A retailer earning $15,000 a year on its cash balances would show it separately from sales. For banks and other lenders, interest income is their main source of revenue, and the gap between it and interest expense drives net interest margin, one of the key measures of bank profitability.
The amount depends on the principal, the rate and the time, as explained under simple interest and compound interest. For bonds bought at a discount or premium, interest income is adjusted using the effective interest method so that it reflects the yield at purchase rather than just the coupon. Interest income is generally taxable in the United States, with exceptions such as interest on most municipal bonds, which is exempt from federal income tax. Banks and other payers report interest paid to individuals on Form 1099-INT.