Interest income is the amount of interest that has been earned during a specific time period. This amount can be compared to the investments balance to estimate the return on investment that a business is generating.
The amount of interest may have been paid in cash, or it may have been accrued as having been earned but not yet paid. In the latter case, interest income should only be recorded if receipt of the cash is probable, and you can ascertain the amount of the payment to be received.
Interest income is earned from investments that pay interest, such as in a savings account or certificate of deposit. It is not the same as a dividend, which is paid to the holders of a company's common or preferred stock, and which represents a distribution of the issuing company's retained earnings. Also, the penalties paid by customers on overdue accounts receivable may be considered interest income, since these payments are based on the use of the company's funds (e.g., accounts receivable) by a third party (the customer); some companies prefer to designate this type of income as penalty income.
Interest income is recorded within the interest income account in the general ledger. This line item is typically presented separately from interest expense in the income statement.
Interest income is usually taxable; the ordinary income tax rate applies to this form of income.
In a bank, the excess amount of interest earned on investments over the amount paid out for deposits is referred to as net interest income.