Interest revenue definition
/What is Interest Revenue?
Interest revenue is the income earned from lending money or allowing others to use funds over time. It arises from financial instruments such as loans, bonds, notes receivable, and interest-bearing bank deposits. The lender recognizes interest revenue as it is earned, usually based on the outstanding principal and the applicable interest rate. In accounting, it is reported on the income statement as part of operating or nonoperating income, depending on the nature of the entity’s activities.
Accounting for Interest Revenue
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:
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.
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Presentation of Interest Revenue
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.
FAQs
How Does Interest Revenue Differ from Dividend Income?
Interest revenue is earned from lending arrangements or fixed-income investments, such as bonds, loans, or savings accounts, and is typically based on a fixed rate over time. Dividend income, on the other hand, is received from equity investments like common or preferred stock and is dependent on the issuing company’s profitability and dividend policy. While interest is usually contractual and predictable, dividends are discretionary and may vary or be omitted entirely.