Interest Receivable Journal Entry
When the company has the interest-earning deposit at the bank or other note receivable with interest-bearing, it should account for any interest receivable at the period-end adjusting with a proper journal entry. This is due to the interest (revenue) is earned through the passage of time.
Likewise, without proper journal entry at the end of the period, the company’s total assets in the balance sheet as well as total revenues in the income statement may be understated.
However, if the company’s interest-earning deposit or other notes receivable has the interest payment date at the end of the period, there won’t be any interest receivable as the company will just debit the cash account with the credit of interest revenue directly.
Interest receivable journal entry
The company can make the interest receivable journal entry at the period end adjusting by debiting the interest receivable account and crediting the interest revenue account.
The interest receivable is an asset account on the balance sheet while the interest revenue is an income statement item. Likewise, this journal entry increases both total assets and total revenues by the same amount.
When the company receives the interest payment, it can make the journal entry by debiting the cash account for the interest and crediting the interest receivable account.
After this journal entry, the interest receivable that the company has recorded in the prior period adjusting entry will be eliminated.
Interest receivable example
For example, on Jan 1, 2021, the company ABC lends $50,000 with the interest of 0.5% per month to the company XYZ. The note has 24 months maturity, in which the company XYZ will pay back the principal at the end of maturity.
However, in the agreement, the company XZY will pay interest on the first day of each month starting from Feb 1, 2021, until the end of note maturity.
What is the journal entry for interest receivable?
- on Jan 31, 2021, when the company ABC makes the month-end adjusting entry
- on Feb 1, 2021, when the company ABC receives the first interest payment
On Jan 31, 2021
The company can make the journal entry for interest receivable of $250 (50,000 x 0.5%) at the Jan 31 adjusting entry as below:
On Feb 1, 2021
When the company receives the interest payment on Feb 1, 2021, it can make the journal entry to eliminate the interest receivable that it has recorded on the prior period adjusting entry as below:
It is useful to note that, in practice, when the interest receivable is insignificant (e.g. due to the small balance of notes receivable or low-interest rate on deposit), the company usually only records the interest when it receives the interest payment. Doing this helps to reduce some of the works that add too little value to the company.
And if this is the case, the company will directly record the cash received with the interest revenue. So, there will be no journal entry for interest receivable at all.