Accrued interest is the form of interest that has be calculated and recognized by the company on various financial documents and records but still it is not paid or received by the company. Interest that is recognized by the company is either payable interest that is termed to be the liability of the company or it is the receivable interest. The occurrence of accrued interest is majorly due to the difference between the actual timings of the cash flow within the organization and the measurement of these cash flows.
Another form of accrued interest is the interest that is accumulated on the bonds since its last payment till the date of settlement of the bond. In order to get a better understanding of accrued interest lets have an example of accrued receivable interest. Let’s say for example the company has sold a batch of products to another company. The other company has purchased the product on loan and don’t make the complete payment. Assume that the loan of the total price of the batch of products is due on September 1st but the financial year of the company that has sold the goods ends in December so the three months from September to December will yield interest on the loan amount and this interest is considered to be as accrued receivable interest.
In the case of bonds the accrued interest is added to the actual contact price and is termed as the amount earned since the last coupon payment made by the bond holder. In this case the payment is recorded officially but as it is not due and the bond is not expired yet, the owner of the bond has not received it officially.
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