Interest receivable is money that a company has accrued but is to receive. Whenever interest income has accumulated, a journal entry must be made to report it on the day it was due. Interest receivable is an accrued income, which is the money an organization expects to receive. Accrued incomes are treated as assets in the company’s books and must be recorded when they were realized (Edmonds et al., 2019). The accrual principle suggests that companies should recognize incomes realized, but not just when they receive payments. On the contrary, expenses are recorded when they are expedited. Vann Company recorded interest receivable in August because it was the time they realized the income. Therefore, the company had to record interest receivable when it was realized because it was an accrued income.
Postponing interest receivables would subject the company to uncertain conditions, which could lead to losses. For example, changes in interest rates and inflation could affect the company’s value of interest accrued. Interest rate fluctuations could reduce the reduced amount owed to the company at the end of the period (Edmonds et al., 2019). Interest receivable is an asset to the company and appears in the balance sheet. On the other hand, interest receivable is only recorded in the income statement once the payment has been received (Edmonds et al., 2019). Recording interest receivable in the balance sheet without capturing the same in the income statement cannot bring inconsistency since incomes are recorded when their payments are received, while expenses are recorded in the period they are incurred.
Interest paid is only recognized in the company’s income statement when such payments are received. At that point, the item is not recognized as an asset but as income. At the end of the loan period, when Brown Company meets the accrued interest, the company will debit the interest receivable account and credit the interest income account. In addition, the company will need to recognize the interest income received by debiting cash and crediting the interest receivable account.
Reference
Edmonds, T. P., Edmonds, C. T., Edmonds, M. A., McNair, F. M., & Olds, P. R. (2019). Fundamental financial accounting concepts. McGraw-Hill Education.