Comparing Accrued Cost and Accrued Interest

Accrued Expense vs. Accrued Interest: An Overview

Something that has happened but hasn't been paid for is considered an accrual. This can include completed work or rendered services that have not yet been paid for, resulting in an accrued expense.

Then there is interest that has been charged or accrued, but not yet paid, also known as accrued interest. Accrued interest can also be interest that has accrued but not yet received.

Accrued expenses generally are taxes, utilities, wages, salaries, rent, commissions, and interest expenses that are owed. Accrued interest is an accrued expense (which is a type of accrued liability) and an asset if the company is a holder of debt—such as a bondholder.

KEY TAKEAWAYS

• Accruals are things—usually expenses—that have been incurred but not yet paid for.

• Accrued expenses are expenses, such as taxes, wages, and utilities, that have accrued but not yet been paid for.

• Accrued interest is an example of an accrued expense (or accrued liability) that is owed but not yet paid for (or received).

• Accrued expenses are recorded as liabilities on the balance sheet.

• Accrued interest is recorded either as an expense or as revenue on the income statement; it depends on whether the interest is being paid or received.

Accrued Expense

Accrued expenses, which are a type of accrued liability, are placed on the balance sheet as a current liability. That is, the amount of the expense is recorded on the income statement as an expense, and the same amount is booked on the balance sheet under current liabilities as a payable. Then, when the cash is actually paid to the supplier or vendor, the cash account is debited on the balance sheet and the payable account is credited. Accrued expenses are the opposite of prepaid expenses.

An accrued expense could be salary, where company employees are paid for their work at a later date. For example, a company that pays its employees monthly may process payroll checks on the first of the month. That payment is for work completed in the previous month, which means that salaries earned and payable were an accrued expense up until it was paid on the first of the following month.

Accrued Interest

Accrued interest is the amount of interest that is incurred but not yet paid for or received. If the company is a borrower, the interest is a current liability and an expense on its balance sheet and income statement, respectively. If the company is a lender, it is shown as revenue and a current asset on its income statement and balance sheet, respectively. Generally, on short-term debt, which lasts one year or less, the accrued interest is paid alongside the principal on the due date.

For example, accrued interest might be interest on borrowed money that accrues throughout the month but isn’t due until month’s end. Or accrued interest owed could be interest on a bond that’s owned, where interest may accrue before being paid.

Accrued interest can be reported as a revenue or expense on the income statement. The other part of an accrued interest transaction is recognized as a liability (payable) or asset (receivable) until actual cash is exchanged.

Accrued Expense vs. Accrued Interest Example

Accrued interest is reported on the income statement as a revenue or expense. In the case that it’s accrued interest that is payable, it’s an accrued expense. Let’s say Company ABC has a line of credit with a vendor, where Vendor XYZ calculates interest monthly. On Jul. 31, 2019, the vendor calculates the interest on the money owed as $500 for the month of July.

The interest owed is booked as a $500 debit to interest expense on Company ABC’s income statement and a $500 credit to interest payable on its balance sheet. The interest expense, in this case, is an accrued expense and accrued interest. When it’s paid, Company ABC will credit its cash account for $500 and credit its interest payable accounts.

However, for Vendor XYZ the accrued interest is an asset and booked as income. On Jul. 31, the vendor debits its interest receivable account and credits its interest income account. Then, when paid, Vendor XYZ debits its cash account and credits its interest receivable account.

What is an example of an accrued expense?

Accrued expenses are expenses incurred but not yet paid. Examples of accrued expenses are taxes, rent, and wages. For example, a worker has completed 40 hours of work in a pay period. The work was performed but no payment has been made for the services rendered. As a result, the employee's wage is an accrued expense for the employer until paid.

How do I calculate accrued interest?

Accrued interest is interest earned but not yet paid. Accrued interest is calculated on the last day of an accounting period and is recorded on the income statement. To calculate accrued interest, divide the annual interest rate by 365, the number of days in a calendar year. Then, multiply the product by the number of days for which interest will be incurred and the balance to which interest is applied. For example, the accrued interest for January on a $10,000 loan earning 5% interest is $42.47 (.0137% daily interest rate x 31 days in January x $10,000).

How do I record accrued interest?

Accrued interest is recorded on an income statement at the end of an accounting period. Accrued interest is recorded differently for the borrower and lender. Those who must pay interest will record the accrued interest as an expense on the income statement and a liability on the balance sheet. If payable within one year, it is recorded as a current liability. If payable in more than 12 months, it is recorded as a long-term liability. Lenders record the accused interest as revenue on the income statement and as a current or long-term asset on the balance sheet.

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