Interest Receivable
Interest receivable is an accounting term that refers to the amount of interest that has been earned by investments, loans given out, or other interest-earning assets, but has not yet been received. It’s essentially the interest income that a company has recognized but has not yet collected. It’s a type of asset and is often categorized as a current asset on a company’s balance sheet, if it’s expected to be received within one year.
Let’s say a company loans money to another party under terms that include an interest rate. Over time, this loan accrues interest. Until the interest is actually paid, it remains “interest receivable” from the company’s perspective. Once the interest payment is made, the company records this as interest income, and the amount of interest receivable is reduced correspondingly.
It’s important for a company to track its interest receivable carefully. It’s an asset, but it’s also an indication of cash flow that’s expected but not yet realized. If a company consistently has high levels of interest receivable, it may indicate problems in collecting the interest that’s due, which could impact its liquidity and cash flow management.
Example of Interest Receivable
Let’s illustrate the concept of interest receivable with a simple example.
Suppose Company A lends $1 million to Company B on January 1, with an annual interest rate of 10%. The agreement states that Company B will pay the interest annually on December 31.
Now, as time progresses, Company A is earning interest on the loan it gave to Company B, even though no cash has yet been received.
By June 30, Company A has effectively earned six months of interest on the loan, which is $50,000 (0.10 annual interest rate * $1 million principal * 0.5 year = $50,000). But since Company B won’t pay the interest until December 31, Company A will report this $50,000 as “Interest Receivable” on its balance sheet for the period ending June 30.
On December 31, Company B pays the full year’s interest of $100,000. At this point, Company A would record this payment as an increase in cash (a debit) and decrease the Interest Receivable account (a credit) for the $100,000. Additionally, it would record this $100,000 as Interest Income on the income statement for the year.
