Accrued Interest
Accrued Interest refers to the interest that has not yet been transacted but has been accounted for. In simple terms, Accrued Interests are the interests that adds up on outstanding receivables and payables.
Organizations maintain accounts payable for the funds they owe to other. Similarly they also maintain accounts receivable for the funds that others owe to them. The interest on this outstanding amount of the receivable and payable accounts is accounted as Accrued Interest in the organization’s balance sheet.
In the Balance Sheet
Accrued Interest receivable is shown under assets whereas this Interest payable is shown under liabilities, in the balance sheet. Even though this interest is not received or paid yet, it is still shown in the balance sheet.
Example
For instance, an organization is supposed to receive an amount of INR 10,000 as interest on an outstanding amount of INR 1,00,000 receivable. The organization will record this amount as Accrued Interest in its balance sheet, on the asset side, for the period in which this interest is accrued.
This Interest is reserved at the starting of every month as reserving entries. It is neither necessary nor useful to record this Interest if the amount is irrelevant to the financial statements of the organization. This would make the financial statements complicated and at the risk of errors.
