What is interest income?
Interest income is earnings on cash held in deposit accounts. It is recorded for the period the cash earns it, separate from the business's main revenue.
Definition
Interest income is what cash earns while it sits in a bank or other deposit account. On the books, it is an Income Statement item, not the cash balance itself.
Accrual books record the interest earned during the period. When the bank credits the account, cash and interest income are recorded together; a timing difference may leave interest receivable until collection.
This item is earnings on cash. It is not revenue from the business's main work, and it is not the operating cost of running the business.
Where it shows up
P&L: Located below operating income.
Balance Sheet: Related to the cash or interest receivable that earned it.
Cash flow: Increases when the interest is collected, reported cash from operating activities increases.
See also: Other Income And Expense · Cash And Cash Equivalents · Net Income
On the Income Statement, interest income sits below the operating-income subtotal. A higher balance or rate can raise it; a shorter period or lower rate can reduce it.
The Balance Sheet holds the cash that earned the interest, or an interest receivable if the bank has not paid yet. On the Statement of Cash Flows, collection is the cash event.
How it works
A business keeps cash in a deposit account, and the bank applies a stated rate to the balance and time on deposit.
The basic flow is:
- Accumulate interest for the days the cash is on deposit.
- Record cash or interest receivable with interest income.
- Reconcile the amount to the bank statement at close.
If the entry is skipped, the ledger can show less cash than the bank. The ending bank balance is not itself interest income; only the period's earnings belong on this line.
Example
Maple Street Dental keeps extra cash in a savings account. The bank adds $90 of interest for the month.
The practice records:
Debit: Cash $90
Credit: Interest income $90
Cash and the below-operating-income item each rise by $90. Patient-service revenue does not change, because the amount came from cash on deposit rather than work performed.
Common mix-ups
Interest income is not the same as service revenue. Revenue comes from the business's work; this line is what cash earns while it sits.
Interest income is not the same as the cash balance. The balance is what is on hand; this line is only the period's earnings.
Interest income is not the same as interest expense. One is what cash earns; the other is what the business pays to borrow.
Related terms
- Other Income And Expense: Non-operating items reported below the operating income line.
- Cash And Cash Equivalents: Bank balances and near-cash holdings that can be spent immediately.
- Operating Bank Account: The main checking account through which day-to-day receipts and payments flow.
- Net Income: What is left from revenue after every expense, including interest and taxes, is subtracted.
- Income Statement: A statement showing revenue earned and expenses incurred over a period, ending in net income.
- Bank Statement: The bank's period record of every transaction and the ending balance.
- Journal Entry: A dated record of debits and credits posted to the ledger.
- Cash Position: The amount of cash on hand at a given moment across all accounts.