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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. 

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