How to Handle Interest Income
The income that your business earns from its savings accounts, certificates of deposits, or other investment vehicles is called interest income. As the bookkeeper, you’re rarely required to calculate interest income using the simple interest or compounded interest formulas described in the earlier sections of this chapter. In most cases, the financial institution sends you a monthly, quarterly, or annual statement that has a separate line item reporting interest earned.
When you get your monthly statement, 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 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 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.