Interest receivable is the amount of interest received by a company from any of its interest-bearing investments. These payments are ones that have not yet been made but are due to the company at some point in the future. For accounting purposes, interest receivable is considered an asset on a balance sheet and is set in opposition to interest payable, which is the amount of money that a company owes in interest payments. It is important for this amount to be realized by a company on its balance sheet because the timing of interest payments can actually vary from when the amount is represented on the balance sheet.
Companies usually make loans and receive them as a part of doing business. These companies must be concerned with interest payments, which are made by the borrower as compensation for the lender's taking on the burden of the risk that repayment will not be made. The interest is generally calculated as a percentage of the principal owed on the loan. Interest receivable is the accounting concept that measures the amount of interest received by a company.
Interest receivable is considered an asset to the company's finances. In opposition to this, any amount of interest owed to creditors, also known as interest payable, is considered a liability. If the amount of interest owed to the company continues to rise without the borrower's paying it off, that amount becomes the accrued interest.
As an example of how this concept works, imagine that a company makes a loan to another entity. The principal of the loan is $10,000 US Dollars (USD), to be paid back in a year's time at an interest rate of 10 percent. That means that the money owed on interest by the borrower is 10 percent of $10,000 USD, or $1,000 USD. Until the interest is paid off to the company, the $1,000 can be included as an asset on the lending company's balance sheet as the interest receivable.
Whenever any part of the $1,000 USD is paid off by the borrower, the balance sheet must then be amended to represent this. Imagine that the borrower pays off $500 USD of the interest owed. This $500 USD is then debited from the interest receivable account and it is credited to the interest revenue account. In this way, the balancing principle that dictates all accounting is achieved.