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    Monday
    Mar312014

    What is interest revenue?

    Interest revenue is the earnings that an entity receives from any investments it makes, or on debt it owns. Under the accrual basis of accounting, a business should record interest revenue even if it has not yet been paid in cash for the interest, as long as it has earned the interest; this is done with an accrual journal entry. Under the cash basis of accounting, interest revenue is only recorded when a cash payment for interest is received by the entity.

    For example, a company using the accrual basis of accounting purchases a certificate of deposit for $10,000, and earns 6% interest on it, which results in interest revenue of $600 after one year. The journal entry to record this interest revenue would be:

      Debit Credit
    Cash 600  
         Interest revenue   600


    However, if the company had been using the cash basis of accounting and the cash had not yet been received by the end of the reporting period, no interest revenue would be recorded in that period.

    The main issue with interest revenue is where to record it on the income statement. If an entity is in the business of earning interest revenue, such as a lender, then it should record interest revenue in the revenue section at the top of the income statement. Alternatively, if an entity only earns interest revenue as an ancillary treasury function (as is the case with most companies), then it should record interest revenue in the Other Revenue and Expense section, which is located after the Operating Income section of the income statement. Placing it here keeps readers of an entity's financial statements from getting the impression that revenue from continuing operations is higher than is actually the case. As such, the latter approach is the more conservative treatment of interest revenue.

    Related Topics

    What is Accrued Income?
    What is Accrued Revenue?
    What is Unearned Revenue?
    What is Unrecorded Revenue?
    When Can I Recognize Revenue?

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