how to treat interest received and accrued interest in income and expenditure account and balance sheet
Answers
BREAKING DOWN Accrued Interest
Accrued interest is calculated based on the last day of the accounting period. For example, if interest is payable on the 20th of each month and the accounting period is the end of each calendar month, the month of April will require an accrual of 10 days (21st to the 30th) of interest. Accrued interest is reported on the income statement as a revenue or expense. Alternatively, the portion of revenue or expense yet to be paid or collected is reported on the balance sheet as an asset or liability. Because accrued interest is expected to be received or paid within one year, it is often classified as a current asset or current liability.
Accrual Principle
The application of accrued interest is a result of accrual accounting which counts economic events when they occur regardless of receipt of payment. It is the method associated with the matching principle of accounting. The matching principle states that revenues and expenses are realized when they occur rather than when payment is received or expended. The accrual principle differs from the cash accounting principle, which recognizes an event when cash or other forms of consideration are received. To illustrate how the accrual principle works, consider a retailer selling a customer goods on credit in September. According to the accrual principle, the transaction is to be recorded immediately in the accounts receivable account. The transaction will also be accounted for as income for September although no payment was received for the transaction.