Handling Interest Income for Your Business
The income that your business earns from its savings accounts, certificates of deposits, or other investment vehicles is called interest income. A bookkeeper is rarely required to calculate interest income using simple interest or compound interest formulas. The financial institution usually sends you a monthly, quarterly, or annual statement that has a separate line item reporting interest earned.
When you receive your monthly statement from the financial institution, you then reconcile the books. Reconciliation is a process in which you prove out whether the amount the bank says you have in your account is equal to what you think you have in your account.
The first step in the reconciliation process involves recording any interest earned or bank fees in the books so that your balance matches what the bank shows. The following figure shows you how to record $25 in Interest Income.
If you’re keeping the books manually, a journal entry to record interest would look similar to this:
|Interest Income||$ XXX|
|To record interest income from American Savings Bank.|
When preparing financial statements, you show Interest Income on the income statement in a section called Other Income. Other Income includes any income your business earned that was not directly related to your primary business activity — selling your goods or services.