Definition of Interest Income
Interest income is the amount of interest earned on investments (that promise to pay interest) and/or compensation for agreeing to receive cash payments from customers at a later than normal date.
The interest income earned by most companies is considered to be nonoperating income or other income. (However, banks and other lenders, whose primary activities involve earning interest, will report their interest earned as part of their operating income.)
Examples of Interest Income
Assume that a company keeps its idle cash in U.S. Treasury bills and notes and uses the accrual method of accounting. The company will report interest income during the accounting periods when the interest is earned. Typically this is done through adjusting entries which debit Interest Receivable and credit Interest Income or Interest Earned.
If a company allows a client to pay for a service one year after the service is completed, the amount received is assumed to consist of two parts:
- Interest for waiting one year to be paid
- The present value of the services provided
We discuss this further in our blog post on the What is the time value of money?
FAQs
An amount earned by a company on its interest bearing bank accounts or other investments. The amount should be reported as Interest Revenues, Interest Income, or Investment Revenues in the accounting period in which the interest is earned.
What is the meaning of interest income? ›
Interest income is money earned by an individual or company for lending their funds, either by putting them into a deposit account in a bank or by purchasing certificates of deposits. Interest expense, on the other hand, is the opposite of interest income.
What does interest revenue mean? ›
Interest revenue is the interest income an entity earns through the loaning out of money, through investments, or through receiving interest from deposited money held in financial accounts. In other words, interest income can be defined as interest earned through loans, investments, or deposit activities.
What is the meaning of interest earned? ›
What is Interest Earned? Interest earned is the rate at which an investment earns value on top of principal. Usually, earned interest is expressed as either a total dollar amount, or as a percentage of your total portfolio or investment.
How do I calculate my interest income? ›
The formula for calculating simple interest is A = P x R x T.
- A is the amount of interest you'll wind up with.
- P is the principal or initial deposit.
- R is the annual interest rate (shown in decimal format).
- T is the number of years.
Example of Net Interest Income
If a bank has a loan portfolio of $1 billion earning an average of 5% interest, the bank's interest revenue will be $50 million. On the liability side, if the bank has outstanding customer deposits of $1.2 billion earning 2% interest, then its interest expense will be $24 million.
Do you pay taxes on interest income? ›
Most interest income is taxable as ordinary income on your federal tax return, and is therefore subject to ordinary income tax rates. There are a few exceptions, however. Generally speaking, most interest is considered taxable at the time you receive it or can withdraw it.
Is interest income the same as revenue? ›
We can simplify it as follows: Interest income is revenue for the payee and an expense for the payer. Interest revenue increases the payee's tax liability and reduces the payee's tax liability because interest expense is tax deductible. Both interest revenue and interest expense are recorded in the income statement.
When to recognize interest income? ›
Interest income, dividends, and realized gains and losses should be recognized when earned. Investments are generally reported at fair value and that unrealized gain or loss should be reported along with realized gains and losses. Bank/investment/fund statements.
What type of account is interest income? ›
Account Types
| Account | Type | Credit |
|---|
| INTEREST EXPENSE | Expense | Decrease |
| INTEREST INCOME | Revenue | Increase |
| INTEREST PAYABLE | Liability | Increase |
| INTEREST RECEIVABLE | Asset | Decrease |
90 more rowsGenerally speaking, a higher Times Interest Earned Ratio is a good thing, because it suggests that the company has more than enough income to pay its interest expense.
Is interest income an asset? ›
Yes, interest receivable is considered a current asset since it can typically be converted into cash within one year or less.
How much interest will $50,000 earn in a year? ›
How much interest will I earn on £50,000? With £50,000 in Monument Bank's easy access account paying 5.01%, you could earn £2,505.00 over a year, or £208.75 per month.
What is interest income on W2? ›
The income a person receives from certain bank accounts or from lending money to someone else. taxable interest income. Interest income that is subject to income tax. All interest income is taxable unless specifically excluded.
How much interest will $500,000 earn in a year? ›
If you were to place $500,000 in a high-yield savings account with a 2.15% APY and wait one year, you will have earned $10,750 in interest. This rate is likely insufficient to keep up with annual inflation, which means your money will become less valuable at a higher rate than when it's accruing interest.
Is interest income the same as earned income? ›
B. Interest income is considered unearned income.
Why did I get interest income from the IRS? ›
If you pay more tax than you owe, we pay interest on the overpayment amount. Underpayment and overpayment interest rates vary and may change quarterly.
Is interest income the same as gross income? ›
Gross income includes wages, dividends, capital gains, business and retirement income as well as all other forms income. Examples of income include tips, rents, interest, stock dividends, etc.
What happens if you don't report interest income? ›
If you receive a Form 1099-INT and do not report the interest on your tax return, the IRS will likely send you a CP2000, Underreported Income notice. This IRS notice will propose additional tax, penalties and interest on your interest payments and any other unreported income.
