Interest revenue is the income that a company earns from its investments in bonds, loans, or other interest-bearing assets. It’s often recorded as a line item on a company’s income statement.
This interest revenue could come from a variety of sources, such as:
- Loans: If a company lends money to another business or individual, it typically charges interest on the loan. The money earned is recorded as interest revenue.
- Investments in Bonds: When a company invests in bonds (whether corporate bonds, municipal bonds, or government bonds), it will receive periodic interest payments from the bond issuer. These payments are recorded as interest revenue.
- Bank Accounts and Certificates of Deposit: If a company keeps a portion of its money in interest-bearing accounts or certificates of deposit, the interest earned on these accounts is recognized as interest revenue.
In general, interest revenue is recognized and recorded in the financial statements when it’s earned, not necessarily when it’s received, following the accrual basis of accounting.
It’s important to note that while interest revenue represents an inflow of cash, it’s different from the principal repayments on loans or the return of the initial investment in bonds, which are also inflows but are not recorded as revenue.
Example of Interest Revenue
Suppose Company A lends $500,000 to Company B at an annual interest rate of 6%. The terms of the loan dictate that Company B will repay the interest annually.
By the end of the first year, Company A has earned interest revenue of $30,000 (6% of $500,000). Even if Company B hasn’t yet paid this interest, under the accrual basis of accounting, Company A can recognize the $30,000 as interest revenue for that year. On the income statement, it would be recorded under revenue, often as a line item called “Interest Revenue” or “Interest Income.
When Company B pays the interest at the end of the year, Company A will then record a decrease in “Interest Receivable” and an increase in its cash account on the balance sheet.
This example illustrates how interest revenue is earned, recognized, and eventually collected. The exact method and timing of recognizing interest revenue can vary based on the specifics of the loan agreement and the accounting standards the company follows.