What is accrued interest?
Definition: Ensued interest is the amount of interest that
must be paid on a debt, such as a bond, but has not yet been paid. It is posted
at the end of the reporting period as an adjusting journal entry that you
cancel on the first day of the next period.
Accrued interest is a term for the interest charged on
outstanding debts, such as loans and bonds. In other words, it is the total
amount of interest on a debt that has not yet been paid. This is one of the key
features of accrual (or accrual) accounting, which follows guidelines related
to revenue recognition and compliance with accounting principles.
Accrued interest is the interest accrued as a result of
obtaining a loan. This is the balance of interest that has not been paid at the
time of accrual.
The accrued interest can be understood as the accrued
interest income of the lender, while it is understood as the accrued interest
expense of the borrowers. The borrower's outlook is considered a current
liability, as it is expected to be settled within a year. And from the lender's
point of view, it is considered a current asset expected to be received within
a year. Consequently, this is reflected in the income statement or balance
sheet of the company.
The relationship between accrued accounting and accrued
interest
According to the concept of accrual (or accrual) accounting,
any event or transaction of a financial nature must be recorded when it occurs.
Even though there is no cash change at the moment. By recording accrued
interest, the company confirms the availability of funds to be received or paid
later.
In accrual (or accrual) accounting, the revenue recognition
principle and the matching principle are relevant to accrued interest. The
principle of revenue recognition allows revenue to be recognized independently
of the exchange of cash at a specific time. And the compliance principle
establishes that expenses must be recorded in accordance with the corresponding
income during the same reporting period.
Consequently, both principles affect accrued interest. For
example, a company buys equipment for which it obtained a bank loan. The
company is now using this equipment to run its business. The business now has
to pay monthly payments and interest in subsequent months, rather than at the
time they were made. And at the end of each month, the company will record this
as accrued interest, which is a liability. The bank will reflect them in the
assets of their balance sheet, because for them it is an income.
Interest accrued on bonds
The bond is considered one of the debt instruments. It is
usually issued by the government or organizations when they want to raise
funds. Accrued interest on a bond is interest that has accrued and has not been
paid since the last day of the bond's interest payment.
Bond interest is generally paid annually or semi-annually.
The accrued interest is the part of the interest that the borrower waives from
the date of the last coupon payment until the bond issue date. The formula for
accrued interest is shown below:
Accrued interest = (Days since the last payment date / days
in the coupon payment period) X Coupon payment for each period.
Example of interest rate accrued
Accumulated interest rate
Suppose ABC borrows $ 20,000 on March 16 from your bank at
6% per year, and the first interest payment is due 30 days later. ABC and the
bank now have reporting years ending December 31.
Then on March 31, the accrued interest would be $ 50 ($
20,000 X 6% = $ 1,200 per year = $ 100 per month = $ 50 for 15 days).
Now, when you adjust the ABC record, an interest expense of
$ 50 will be canceled and interest payable of $ 50 will be charged. Also, the
bank's adjustment entry will deduct $ 50 from the accrued interest receivable
and credit the interest income of $ 50.
Payment of accrued interest versus regular interest
Regular interest is the interest charged on the loan. The
borrower must pay a certain interest rate on the loan amount. The loan amount
can be provided by a bank, financial institution or any individual.
Accrued interest is accrued interest that has been
recognized and recorded in the company's general ledger, but has not been paid.
The accrued interest is defined as the interest rate that
the investment brings you, while the accrued interest or interest balance is
understood as the interest that the investment brings, but you have not yet
received that interest. Finally, the interest paid can be understood as the
interest you received
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