Definition of Interest Income
Interest income is the amount of interest earned on investments (that promise to pay interest) and/or compensation for agreeing to receive cash payments from customers at a later than normal date.
The interest income earned by most companies is considered to be nonoperating income or other income. (However, banks and other lenders, whose primary activities involve earning interest, will report their interest earned as part of their operating income.)
Examples of Interest Income
Assume that a company keeps its idle cash in U.S. Treasury bills and notes and uses the accrual method of accounting. The company will report interest income during the accounting periods when the interest is earned. Typically this is done through adjusting entries which debit Interest Receivable and credit Interest Income or Interest Earned.
If a company allows a client to pay for a service one year after the service is completed, the amount received is assumed to consist of two parts:
- Interest for waiting one year to be paid
- The present value of the services provided
We discuss this further in our blog post on the What is the time value of money?