What is interest income?

Definition

Interest income is what cash earns while it sits in a bank or credit-union account. On the books, this is an Income Statement item, not a patient visit and not the cash balance itself.

A dental practice with a savings sweep books this month's credit-union credit here. Cleaning teeth is the main work; the interest is not.

Accrual books record the days the cash was on deposit. Cash-basis books usually see the same moment, because the credit already hit the account.

This item is the period's earnings on cash. It is not revenue from visits, and it is not the keep-the-practice-open costs that sit above operating income.

Where it shows up

P&L: Located below operating income.

Balance Sheet: Related to the cash that earned it.

Cash flow: Increases when the interest hits the bank, reported cash from operating activities increases.

See also: Other Income And Expense · Cash And Cash Equivalents · Net Income

When you look at your Income Statement, this item sits under the operating-income subtotal. Visit revenue and the costs of running the practice sit above that subtotal.

When the figure is high, more cash sat on deposit or the rate ticked up. When it is low, the sweep was thin or the month was short.

The Balance Sheet does not keep this period's earnings after the close. The cash that earned it sits in cash and cash equivalents.

On the Statement of Cash Flows, the credit is the cash event. Cash from operating activities rises when the interest hits the bank.

The operating bank account is where day-to-day receipts and payments flow. A sweep may move leftover cash overnight and still earn this item.

Operating expenses stay above operating income. This credit does not offset rent or wages; it sits below the core leftover.

How it works

The practice keeps cash in checking and a savings sweep. The credit union pays a small rate on the balance that sat there.

Each month the books debit cash and credit this item for the amount credited. The pair matches the bank so ledger cash agrees with the account.

If you skip the entry, the books will show less cash than the credit union. The missing piece is this item, not a visit you forgot.

Stay with earnings on cash when you read the line. A refund from a supplier is not this item, even though cash also goes up.

Do not treat the whole ending bank balance as this line. The balance is what is left; this line is only the interest the cash earned.

A larger sweep after a busy hygiene week can raise next month's credit. The visits stay in revenue; only the bank's payment sits here.

After the month closes, this item is part of the period's leftover. Next month starts the count again from zero.

Example

Maple Street Dental keeps leftover cash in a credit-union savings sweep. This month the credit union adds $90 of interest.

The practice records:

Debit: Cash $90

Credit: Interest income $90

Cash (an asset) rises by $90, and this below-the-line item rises by $90. Visit sales for the month do not change.

Hygiene and visit revenue this month is $48,000. Operating income is unchanged by the $90; the leftover after interest and tax is $90 higher.

If the same $90 had been recorded as visit revenue, the practice would look busier than it was. No extra cleaning was billed; cash sitting overnight earned a credit.

A later month with a thinner sweep might show $40. The line moves with the cash that sat and the rate the credit union paid.

Common mix-ups

Interest income is not the same as visit revenue. Revenue is from patient work; this line is what cash earned while it sat.

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 on that cash.

Interest income is not the same as interest expense. One is what your cash earns; the other is what you pay 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.