Any interest payable or receivable at the time of preparation of balance sheet is known as accrued interest. For example when a business firm accepts any loan from outsiders, in that case it is the duty of the firm to pay the interest on loan to the lender as per the terms of the loan agreement. But it is always not possible to settle the interest amount in same financial year. If any interest is payable at the date of finalization of balance sheet for the current financial year, then the unpaid interest will be called as accrued interest.
Accrued interest may relate to loans or deposits accepted from outsider or given to outsider.
Treatment of Accrued Interest in Final Accounts
It means the accrued interest is unpaid interest but due at the time of preparation of balance sheet. Accrued interest on loans accepted by the firm, will be shown in liabilities side of the balance sheet and the same amount also shall be added to interest account and will be shown in debit side of profit and loss account.
Similarly, in case of loans given by business firm to the outsiders and if the interest on loans or deposits is due but not received at the time of preparation of final accounts, will be shown in assets side of balance sheet. The accrued interest, in this case shall be added in interest received account and shall be shown in credit side of profit and loss account.
Accounting Treatment of Accrued Interest
a) Suppose interest is receivable on the deposits etc. then it will be treated as income of the business firm. In this case the following entry shall be passed:-
Entry to be passed:-
Debit: Interest Receivable Account
Accrued Interest Account
Credit: Interest Received Account
b) Suppose interest is payable on loans or on deposits etc. then it will be treated as Expenditure of the business firm. In this case the following entry shall be passed:-
Type of Voucher to be prepared:- Journal Voucher
Entry to be passed:-
Debit: Interest Account
Credit: Interest Payable Account
Accrued Interest Account.
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