Interest receivable is defined as the amount of interest an individual or a firm has earned, yet they have not received them in cash. The typical journal entry that people would use to document such transaction is a debit to their interest receivable account. At the same time, they would record a credit to their interest revenue account. When they receive the real interest payment, the double entry (Also see Advantages of double entry accounting) will be a debit to their cash account, as well as a credit to their interest receivable account. By doing so, they will be able to eliminate the balance in their interest receivable account.
Typically, people will categorise the interest receivable account as a current asset on their business’s balance sheet, except if they do not expect the borrower to pay them within a year.
The way financial accounting (Also see How do You Distinguish Financial Accounting and Management Accounting?) would treat interest receivable may change, and the examples are as follows:
Interest charge on the invoice
A business might charge interest on an overdue invoice. In such a situation, the chances that it will receive the payment are low, and most likely it will obtain only a small amount. Thus, if a firm does not accrue the interest receivable under such a condition, it is acceptable. Alternatively, a company can recognise any interest paid on the income statement when they obtained the payment, which implies that the business will not record it as interest receivable on their balance sheet. Contrarily, an experienced accountant (Also see How Can Good Accountants Help in Growing Your Business and Reducing Your Expenses) would accrue the best estimation of the interest receivable if it has received a material amount of interest income from that particular source before.
Invested loan or funds
If an organisation has decided to extend a loan or invest funds to a third-party, it needs to accrue the sum of interest receivable on the loan or funds, up to the date of when they state the interest receivable on its balance sheet. If a substantial risk of non-payment is present, the firm might need to generate a counterbalancing bad debt allowance for some parts of the interest receivable. This will lower the net amount of its interest receivable.
If you find it challenging to manage your interest receivable, engage an accounting firm Johor Bahru to help you with it. Hiring professional accounting services is crucial to ensure that you would not be confused when you are dealing with the interests that your business have or have not received.