Interest Receivable

Interest receivable is an asset account that records interest a business has earned on money it has lent or invested but has not yet received in cash at the balance sheet date. It arises whenever interest accrues between payment dates, for example on notes receivable from customers, loans to employees or other companies, bonds and other debt investments, and bank deposits that pay interest at maturity. At each period end, the earned but unpaid interest is recorded so that income is reported in the period in which it was earned.

Interest receivable is a form of accrued revenue and is usually classified among current assets on the balance sheet, because it is expected to be collected within a year. It is often presented together with other receivables, or within the carrying amount of a related investment, with details in the notes. The borrower's side of the same balance is interest payable.

The receivable equals the interest accrued since the last payment date:

Here $\text{Principal}$ is the outstanding amount lent or invested, $\text{Annual rate}$ is the stated interest rate, $\text{Days accrued}$ is the number of days since interest was last paid, and $\text{Days in year}$ is 360 or 365 depending on the agreement. For investments bought at a premium or discount, the interest income recognized differs from the cash interest receivable, because income is measured with the effective interest method.

A distributor accepts a $60,000, 9 percent, six-month note from a customer on 1 November in place of an overdue account. Interest and principal are due on 30 April. At the distributor's 31 December year end, two months of interest have been earned: $60,000 times 0.09 times 2/12, or $900. The adjusting entry debits interest receivable for $900 and credits interest income for $900.

On 30 April, the customer pays $62,700, made up of the $60,000 principal and $2,700 of interest for six months. The distributor debits cash for $62,700 and credits notes receivable for $60,000, interest receivable for $900 and interest income for $1,800, the four months earned in the new year. Without the year-end entry, the first year's income would be understated by $900 and the second year's overstated.

A similar entry applies to bond investments. An investor holding $500,000 of 4 percent corporate bonds paying interest on 31 March and 30 September would, at a 31 December year end, record three months of interest receivable: $5,000.

Interest receivable is only an asset if it is likely to be collected. Under the current expected credit loss model in US GAAP (ASC 326) and the expected credit loss approach in IFRS 9, lenders must consider expected losses on accrued interest as well as principal, although US GAAP allows a company to write off uncollectible accrued interest promptly instead of including it in the allowance. Banks commonly stop accruing interest on loans that are 90 days or more past due, placing them on non-accrual status; any interest previously accrued but not collected is reversed. These practices prevent companies from reporting income on loans that are unlikely to pay, a concern discussed in the entry on non-performing loans.

Typical mistakes include forgetting to accrue interest at period end, accruing interest on notes that are in default, and counting accrued interest twice when the full payment is received. Analysts reviewing a lender or a company with large investments watch for interest receivable growing faster than interest income, which can indicate that borrowers are falling behind. For the investor, interest that becomes receivable is part of total interest income, reported in the income statement for the period it was earned.