Interest earned definition
/What is Interest Earned?
Interest earned is the amount of interest earned from investments that pay the holder a regular series of mandated payments. For example, interest earned can be generated from funds invested in a certificate of deposit or an interest-bearing bank account.
Accounting for Interest Earned
If the entity recording interest earned is using the cash basis of accounting, then the amount of interest earned will be based on the amount of cash actually received. If the accrual basis of accounting is used, then the amount earned will be recorded, irrespective of the amount of cash received. Under the accrual basis, you can record interest earned as long as receipt of the related amount of cash is probable, and you can reasonably estimate the amount of the payment. These differences in definition can mean that interest earned is recognized later under the cash basis of accounting than under the accrual basis.
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Presentation of Interest Earned
Interest earned may be recorded as an element of revenue, but can also be recorded further down the income statement, usually paired with the interest expense account.
Taxation of Interest Earned
Interest earned is usually taxable at the ordinary tax rate.
The Difference Between Interest and Dividends
Interest earned is distinct from dividends, which are only paid to the holders of the issuing company's common stock or preferred stock, and which essentially equate to a distribution of the entity's retained earnings. The interest earned concept also does not apply to the appreciation of the price of a financial instrument.