Let us consider a company that has borrowed money or made an investment. Even though no payments have been exchanged, the interest starts accumulating immediately. Each day, interest increases, creating a liability if the company is the borrower or an asset if it’s the lender. By the end of the accounting period, this growing interest must be accounted for, even if cash hasn’t yet changed hands. This interest is called accrued interest in accounting, which basically means interest has been earned or incurred but has not yet been paid or received by the end of an accounting period.
Accrued interest ensures that financial statements reflect the full reality of ongoing financial obligations or earnings. In this blog, we will explore the concept of accrued interest, diving into its role in accounting and why it’s important for financial accuracy. We’ll also walk through practical examples and calculations of accrued interest, helping you understand how it applies to everyday business transactions.
Accrued interest refers to the interest that has been earned or incurred on a financial obligation or investment but has not yet been paid or received by the end of an accounting period. It is an essential component for understanding an entity’s cash flow and financial health.
This concept ensures financial statements reflect the entity’s actual financial position by recognizing interest as it accumulates, rather than waiting for the cash transaction to occur.
Manual Accounting Is Quietly Draining Your Budget — Your Close Process Could Be 30% Faster!
See how finance teams are driving real ROI with automation — cutting costs and increasing output by up to 40%.
The formula for calculating accrued interest depends on the principal amount, interest rate, and the time period for which the interest has accrued. Here’s the general formula:
Accrued Interest = Principal × Annual Interest Rate × Time Period |
Where:
Principal is the loan or investment amount.
Annual interest rate is the percentage rate applied to the principal annually.
Time Period is expressed as a fraction of a year (for example, for 6 months, the time period would be 6/12, for 90 days, it would be 90/365).
Let us consider a company that has taken a $10,000 loan with a 5% annual interest rate, and you’re calculating interest over 90 days:
Accrued Interest=10,000 × 0.05 × 365/90 =123.29
So, the accrued interest for 90 days would be $123.29
Accrued interest in bonds refers to the interest that has accumulated on a bond since the last interest payment but has not yet been paid to the bondholder. Bonds typically pay interest periodically (e.g., semi-annually), but if a bond is sold between interest payment dates, the buyer must compensate the seller for the interest earned up to that point.
Let us consider you own a $1,000 bond with a 6% annual interest rate. The bond pays interest every 6 months, which means you get $30 twice a year (because 6% of $1,000 is $60 annually, divided into two $30 payments).
Now, if you sell the bond 3 months after the last interest payment, the new buyer will owe you for the interest that’s been building up during those 3 months.
To calculate the accrued interest:
So, the buyer will give you $15 in accrued interest to cover the time you owned the bond, and the buyer will receive the full $30 at the next payment.
HighRadius offers a cloud-based Record to Report Solution that helps accounting professionals streamline and automate the financial close process for businesses. We have helped accounting teams from around the globe with month-end closing, reconciliations, journal entry management, intercompany accounting, and financial reporting.
Our Financial Close Software is designed to create detailed month-end close plans with specific close tasks that can be assigned to various accounting professionals, reducing the month-end close time by 30%. The workspace is connected and allows users to assign and track tasks for each close task category for input, review, and approval with the stakeholders. It allows users to extract and ingest data automatically, and use formulas on the data to process and transform it.
Our Account Reconciliation Software provides an out-of-the-box formula set that can configure matching rules and match line-level transactions from multiple data sources and create templates to automate various transaction processing required for month-end close. Our solution has the ability to prepare and post journal entries, which will be automatically posted into the ERP, automating 70% of your account reconciliation process.
Our AI-powered Anomaly Management Software helps accounting professionals identify and rectify potential ‘Errors and Omissions’ throughout the financial period so that teams can avoid the month-end rush. The AI algorithm continuously learns through a feedback loop which, in turn, reduces false anomalies. We empower accounting teams to work more efficiently, accurately, and collaboratively, enabling them to add greater value to their organizations’ accounting processes.
Accrued interest refers to the interest that has been earned or incurred but not yet paid or received by the end of an accounting period. It ensures that financial statements accurately reflect the true interest obligations or earnings, even if the cash transaction hasn’t occurred yet.
Yes, accrued interest is taxable. It is considered income for the lender or investor and is subject to taxation even if the payment hasn’t been received yet. Tax authorities require that accrued interest be reported in the period it is earned, following the accrual method of accounting.
Accrued interest paid on purchases, such as bonds, should be reported as part of the purchase price but recorded separately in accounting. This amount is considered an interest expense and can be deducted from the total interest income when filing taxes, as it’s paid to the seller for earned interest.
To calculate interest accrued on a loan, use the formula:
Accrued Interest = Principal × Annual Interest Rate × Time Period
The principal is the amount borrowed, the interest rate is the percentage charged on that amount annually, and the time period is expressed as a fraction of the year.
Accrued interest paid on bond purchases should be reported as part of the bond’s purchase price but listed separately in accounting records. This amount is recognized as an interest expense, which can be deducted when calculating taxable income, reflecting the interest earned up to the purchase date.
Yes, accrued interest can be considered an asset when it represents interest that has been earned but not yet received, such as in the case of loans or investments. It is recorded as an interest receivable on the balance sheet, reflecting the expectation of future cash inflow when the interest is eventually paid.
Positioned highest for Ability to Execute and furthest for Completeness of Vision for the third year in a row. Gartner says, “Leaders execute well against their current vision and are well positioned for tomorrow”
Explore why HighRadius has been a Digital World Class Vendor for order-to-cash automation software – two years in a row.
For the second consecutive year, HighRadius stands out as an IDC MarketScape Leader for AR Automation Software, serving both large and midsized businesses. The IDC report highlights HighRadius’ integration of machine learning across its AR products, enhancing payment matching, credit management, and cash forecasting capabilities.
In the AR Invoice Automation Landscape Report, Q1 2023, Forrester acknowledges HighRadius’ significant contribution to the industry, particularly for large enterprises in North America and EMEA, reinforcing its position as the sole vendor that comprehensively meets the complex needs of this segment.
Customers globally
Implementations
Transactions annually
Patents/ Pending
Continents
Explore our products through self-guided interactive demos
Visit the Demo Center