Thursday, May 1, 2014

Accrued Interest

Definition of 'Accrued Interest';-

1. A term used to describe an accrual accounting method when interest that is either payable / receivable has been recognized, but not yet paid /or received. Accrued interest becomes as a result of the difference in timing of cash flows & the measurement of these cash flows. 

2. The interest, that has accumulated on a bond since the last interest payment up to, but not including, the settlement date; explains 'Accrued Interest'

1. For exp, accrued interest receivable occurs when interest on an outstanding receivable has been earned by the entity/company, but has not yet been received. A loan to a customer for goods sold would result in interest, being charged on the loan; If the loan is extended on October 1 and the lending company's year ends on December 31, there will be 2 months of accrued interest receivable recorded as interest revenue in the company's financial statements for the year ended. 

2. Accrued interest will be added to the contract price of a bond transaction. Accrued interest is interest which has been earned since the last coupon payment. Because the bond hasn't expired / the next payment is not yet due, the owner of the bond hasn't officially received the money. If he / she sells the bond, accrued interest is added to the sale price(SP).  

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