What is Interest Earned?
Interest is a fee charged by a lender to a borrower for lending money. For a business, interest earned usually arises on money deposited with a financial institution such as a bank, and can be simple or compound interest.
Interest earned is usually reported in the financial statements of a business in the accounting period in which it is earned under the accounting categories of interest income, interest revenue, or investment revenue.
The amount of interest earned depends on the amount invested, the interest rate, and the length of time over which it is invested.
For example, if a business has deposited 10,000 with a bank earning 5% simple interest, at the end of the year, the interest earned is 10,000 x 5% = 500. If the interest is deposited in the bank account of the business, the accounting journal to post this interest earned to the accounting records would be as follows.
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About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years in all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a BSc from Loughborough University.