Next video:
Loading the player...

Accrued interest has two meanings. In accounting, it is interest that has been earned, but the time for payment has not yet occurred. 

In accounting, accrued interest is the result of the matching principle of accrual-based accounting.  Under the matching principle, income and expenses should be recorded in the period in which they are earned or incurred and not the period in which the cash for them was transferred. 

For instance, ABC Corp has a $120,000 loan from Big Bank with interest at 5%.  Under the current terms of the loan, ABC has to pay each month’s interest ($500) on the 15th day of the following month.  At the end of each month’s accounting period, ABC will record a liability for the $500 in accrued interest that it owes Big Bank but has not yet paid.  The accrued interest payable account will be listed in the short-term liabilities section of ABC’s balance sheet.

Accrued interest is also used in the context of buying and selling bonds. Here, accrued interest is the interest that has accrued but has not yet been paid since the last interest payment made on the bond.  Bonds generally have set times when they pay interest (most pay annually or semi-annually).  Yet bonds are traded in the securities market on a daily basis.  When a bond is sold on a date that is not an interest payment date (which is normally the case) the accrued interest up to the date of the sale is added to the bond’s sales price. 

Related Articles
  1. Investing

    How To Choose The Right Bond For You

    Bond investing is a stable and low-risk way to diversify a portfolio. However, knowing which types of bonds are right for you is not always easy.
  2. Investing

    How Rising Interest Rates Impact Bond Portfolios

    A look at the impact that changing interest rates - rising or falling - have on bonds and what investors need to consider.
  3. Investing

    Why Bond Prices Fall When Interest Rates Rise

    Never invest in something you don’t understand. Bonds are no exception.
  4. Investing

    Retail Notes: A Simpler Alternative To Bond Funds

    These securities are meant to be held until maturity, removing the burden of complex pricing that sometimes plagues bonds.
  5. Investing

    How Interest Rates Impact Bond Values

    The relationship between interest rates and bond prices can seem complicated. Here's how it works.
  6. Investing

    Corporate Bond Basics: Learn to Invest

    Understand the basics of corporate bonds to increase your chances of positive returns.
  7. Investing

    5 Fixed Income Plays After the Fed Rate Increase

    Learn about various ways that you can adjust a fixed income investment portfolio to mitigate the potential negative effect of rising interest rates.
  8. Investing

    5 Best Ways to Earn Interest

    Learn how to use tools to increase your interest earnings. Use compounding interest and breakpoints to increase your interest income.
Hot Definitions
  1. Socially Responsible Investment - SRI

    Socially responsible investing looks for investments that are considered socially conscious because of the nature of the ...
  2. Business Cycle

    The business cycle describes the rise and fall in production output of goods and services in an economy. Business cycles ...
  3. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  4. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  5. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  6. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
Trading Center