Accrued interest is the amount of interest that has accumulated on a loan since the last interest payment and that has yet to be paid. When your small business borrows or lends money, you must record accrued interest at the end of an accounting period to apply it to the proper period. In accounting, a debit or credit can either increase or decrease an account, depending on the type of account. The accounting entry to record accrued interest requires a debit and a credit to different accounts.
The daily interest rate at which interest accrues equals the annual interest rate divided by 365. The accrued interest at the end of a period equals the daily rate times the number of days since interest was last paid times the loan amount. For example, assume your small business has a $5,000 loan with a 6 percent annual interest rate. Assume you last paid interest 30 days ago. The daily interest rate is 0.00016, or 0.06 divided by 365. The accrued interest equals $24, or 0.00016 times 30 times $5,000.
When you record accrued interest as a borrower at the end of the period, you must adjust two separate accounts. First, record a debit for the amount of accrued interest to the interest expense account in a journal entry. A debit increases this expense account on your income statement and applies the expense to the current period. Using the accrued interest from the previous example, debit $24 to the interest expense account.
The second affected account is the interest payable account, which is a liability on the balance sheet showing the amount you owe. Record a credit to this account in the same journal entry for the same amount of accrued interest. A credit increases the interest payable account. To finish the journal entry from the above example, credit $24 to interest payable.
When you lend money, you also record accrued interest in two separate accounts at the end of the period. First, debit the amount of accrued interest to the interest receivable account in a journal entry. A debit increases this account, which is an asset on the balance sheet that shows the amount someone owes you. For example, assume a customer owes your small business $35 in accrued interest at the end of the period. Debit $35 to the interest receivable account.
The interest income account is the other account affected by accrued interest when you lend money. Record a credit to this account for the same amount of accrued interest in the same journal entry. A credit increases interest income on the income statement, which applies the income to the current period. To complete the entry from the previous example, credit $35 to the interest income account.
