Example of Accrued Interest
If you take out a loan with an interest rate of 5% and make payments on the first of every month, the interest that accumulates from the date of your last payment until the date of your next payment is considered to be accrued interest. Accrued interest is usually calculated using the balance of the loan or bond and the interest rate.
Let’s say that on January 1st, Fred’s Startup borrows N20 million from their bank at a 5% annual interest rate. If the first interest is due in one month, that means that:
The accrued interest as of February 1st is N20M X 5% = N1M interest per annum. Which is N83,333.3 monthly (N 1M / 12).
Fred’s company’s accrued interest payable to the bank after one month is N83,333.3.
Use of Accrued Interest
Accrued interest can be important for both borrowers and lenders. For borrowers, it is important to understand the amount of interest that is accumulating on their loan and how it affects their monthly payments.
For lenders, accrued interest represents a form of income that they have earned but not yet received. They may choose to collect the interest monthly or in a lump sum at the end of the loan term.
How Accrued Interests are Documented
Accrued interest is typically documented through the use of an interest accrual account or note. This usually includes information such as the loan or bond balance, the interest rate, the start and end dates of the accrual period, and the amount of interest that has accrued during that period.
Accrued interest is also documented in the financial statements of the borrower or lender. These statements may include balance sheets, income statements, and cash flow statements. Accrued interest is recorded as a liability on the balance sheet, and as income when it is paid or received.
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