Accrued interest refers to the interest that has been earned but not yet received or paid. It’s an interest that has been recognised in the books but has not yet been physically exchanged between the parties involved.
To record accrued interest, a company will typically make an adjusting journal entry, debiting (increasing) an interest expense account and crediting (increasing) an accrued interest liability account.
Accrued interest is crucial for accurate financial reporting. It ensures that a company’s financial statements reflect all the expenses incurred or revenue earned in a given period, even if cash transactions haven’t taken place yet.
Accrued interest is significant for both borrowers and lenders, as it helps ensure that financial statements accurately represent the financial position of a business at any given point in time.