Accruing interest on delinquent loans definition

 

accruing interest on delinquent loans definition

Accrue is a term used to describe the ability for something to accumulate over time, and is most commonly used when referring to the interest, income or expenses of an individual or business. Interest in a savings account , for example, accrues so that over time, the total amount in that account grows. The term "accrue" is often related to the concepts of accrual accounting , which has become the standard accounting practice for most companies.

When something finance-related accrues, it essentially builds up to be paid or received in a future period. Both assets and liabilities can accrue over time. This is why the term "accrue," when related to finance, is synonymous with an "accrual" under the accounting method outlined by Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). An accrual is an accounting adjustment used to track and record revenues that have been earned but not received or expenses that have been incurred but not paid.

The accrual accounting procedure, therefore, measures the performance and position of a company by recognizing economic events regardless of when cash transactions occur, giving a better picture of the company's financial health and causing asset or liability adjustments to build up over time. This is in contrast to the cash method of accounting where revenues and expenses are recorded when cash is actually paid or received. Cash-based accounting does not need adjustments.

Accruing interest on delinquent loans definition

For example, ABC Company earnings $5,000,000 before interest and taxes in its most recent reporting month. Its interest expense for that month is $2,500,000. Therefore, the company's interest coverage ratio is calculated as:

Accrue is a term used to describe the ability for something to accumulate over time, and is most commonly used when referring to the interest, income or expenses of an individual or business. Interest in a savings account , for example, accrues so that over time, the total amount in that account grows. The term "accrue" is often related to the concepts of accrual accounting , which has become the standard accounting practice for most companies.

When something finance-related accrues, it essentially builds up to be paid or received in a future period. Both assets and liabilities can accrue over time. This is why the term "accrue," when related to finance, is synonymous with an "accrual" under the accounting method outlined by Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). An accrual is an accounting adjustment used to track and record revenues that have been earned but not received or expenses that have been incurred but not paid.

The accrual accounting procedure, therefore, measures the performance and position of a company by recognizing economic events regardless of when cash transactions occur, giving a better picture of the company's financial health and causing asset or liability adjustments to build up over time. This is in contrast to the cash method of accounting where revenues and expenses are recorded when cash is actually paid or received. Cash-based accounting does not need adjustments.

The application of accrued interest is a result of the use of accrual accounting in which economic events are reported when the transaction has occurred. In the event of interest, the transaction is considered to have occurred upon the passage of time. Even if the investment or loan agreement does not accrue interest daily, the passage of time results in an accumulation in the legal obligation to pay the debt or collect the interest. Therefore, the accrual principle dictates that interest is accrued not when it is paid or received but when it has been accumulated.

Accrued interest revenue is reported on the financial statements through a debit to the interest receivable account and a credit to interest revenue. This entry accounts for revenue in the period it was actually earned as opposed to when it is later collected. In the subsequent period, the accrued interest revenue entry is reversed and when the cash is collected for the interest, an entry is made to debit the cash account and credit the entire interest revenue. The credit to the interest revenue account will be offset by the reversed debit to the revenue account to reflect the accurate total dollar amount of revenue in the current period.

Accrued interest expense is reported in a similar manner. The accrual entry results in a debit to interest expense and a credit to interest payable. Upon reversing the entry in a future period, an entry is made when the interest is paid by debiting the interest expense account and crediting the cash account.