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Interest Income (Example, Types) | Interest Income in Accounting - YouTube
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today we have a topic with us is called
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interest income what this topic is all
about see just like there is interest
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expenses in the profit and loss
statements there are interest income we
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will try and evaluate this in a very
detailed format have a look over here
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the extract that is taken from the
profit and loss account there's a total
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net revenues data cost of sales is
deducted stores opening expenses all
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rest of the extend expenses are there
then then they comes the interest income
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and other net and interest expense let's
try and evaluate this first what is the
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interest income see interest income is
basically the amount which is you know
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look at it as interest received by the
company's investment so it actually is
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the that is the revenue that is earned
it from lending money so it is the term
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which is used by the companies on their
income statement to report the interest
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on the cash that is held in the saving
account certificates or deposits or
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other sort of investments these
interests was not a part of original
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investment this separately recorded then
the interest income is obtained by
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multiplying the what we call as the
principal amount by the interest rate or
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the time period the money these amount
can be compared to the investment
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balance first awaiting the return on the
investment that business is generating
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so these revenue is taxable and is
recorded in the income section of the
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income statement now we can conclude
that you know the excess revenue the
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excess revenue which is generated from
the interest earned on the asset is the
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income from the interest right now we
will try and take an example here to
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understand the whole thing
see there is net interest income so
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let's take an interest income example of
Bank of America banks are the best
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example for this revenue for the bank is
different from the revenue of the
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non-financial company revenue for a bank
is comprised of net interest income and
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the net non-interest income so for Bank
of America the total interest earned for the
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period was $57.5
billion and the net interest
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income that is a total interest minus
total expense was
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$4.6 billion
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third we'll discuss the types of the
interest income see there are 2 types
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of interest income the one is called the
income from operations see in case where
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company's income statement shows that
you know income for operation and other
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income separately
and you know sort of other income if
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they show both of this thing separately
then the types of the interest income
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depends upon primary the primary
operations of the business now if the
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business is primarily making income from
the investment business is primary making
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income from the interest like for
lending companies in financial
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institution then this is taken as income
from operation so we note that you know
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Bank of America's core income is only
from it is from interest it's : the
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second is the non operating income or it
is also known as the other income
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see if the core income does not come
from the interest then it is non
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operating interest income and comes
under the other income now all
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individuals as well as the organization
you know they have these called
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financial assets from which they earn
the variety of interest and the interest
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which is earned on this on these
investments over a period of time is
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taken as income from income for the
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organization so in most of the cases the
interest which is earned by the
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individuals or the organization is
reported in the income statement either
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under the income from operations income
from the operations or as the other
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income so the Internal Revenue system
that is the IRS you know has made it
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mandatory that the interest must be
reported as the taxable income now we
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will try and incorporate the accounting
part also here we'll try and learn the
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accounting aspect say with reference to
the account accrual method of accounting
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the interest is recorded as it is earned
and not necessarily as it is paid by
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making the assumption that the risk now
of receiving payment is low risk of
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receiving payment is low cannot be
possible so to keep it proper record of
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accounting for interest our detailed
understanding of the investment terms
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and conditions required so the
calculation of these accrued interest is
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dependent on the interest rate
compounding period and the investment
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balances is taken into consideration
though these is the these are the
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amounts that can be either be paid in
cash or it can be accrued as being
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earned but not yet paid so in the later
circumstances this can only be reported
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if there is probability of receiving the
cash and the amount of payment which is
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to be received and that can be ascertain
so it is obtained from the investment or
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the investments of the entity that pay
entry interests such such as the saving
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account or any see that is a certificate
of deposits so it should not be confused
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or mixed up with the dividend as both
are different and the dividend is paid
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to the holders of the company common or
may be preferred stock and it signifies
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you know the distribution of the issuing
companies are retained earnings the
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penalties paid by the customers on the
overdue accounts receivable are also
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treated as the income because you know
these payments are related to use of the
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company's funds like you know account
receive is very custom and there are
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some companies who prefer to mention the
type of the income as you know penalty
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income so this is reported within the
interesting account in the general
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ledger and it is a line item it is the
line item and is generally recorded
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separately from the interest expense in
the income statement so these income is
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taxable as per IRC and and the ordinary
tax rate is applicable to the income now
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the types of the asset which help in
earning interest for the banks are where
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it like you know mortgage auto loans
personal loans and commercial as real
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estate loans
how does interest income actually works
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like in for the individual and banks see
let's say suppose a person runs a
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big-sized capital goods business and he
has a balance of let's say there are
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1050000 that is 1 million the
company's same income now it must be
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understood that note this 1050000 that is 1 million 1.1 million
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clothes he is not going to be lying idle
in the account until the owner decides
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to withdraw the amount so the bank in
which the saving account is maintain the
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loan this money who are the people and
in return they get interest on the loan
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amount and this system is also known as
the fractional banking the banking this
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situation keeps a small percentage of
the actual amount of 1050000 deposit
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in its hand so now these loans are given
by the bank and can be for the long term
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or short term
the short term loans are the overnight
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loans they are given for the overnight
period and they're getting the money
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with the person's deposit in Bank and
then they pay an amount of the interest
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to the owners of the deposits so that
you know the owner is motivated to keep
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the money in the account so for the
entire year the cash balance is is the
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earning interest paid by the bank the
end of the each one so the bank is
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required to send out the details giving
out how much interest
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it has speed to the owners of the
depositors in the bank account and based
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on these statements the owner of the
deposit gets a clear idea of how much
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taxable interest income he has earned on
the financial asset so that the owners
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business gets interest payments which is
recorded in his income statement as in -
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so that's it for this particular topic
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