Accrued interest refers to interest that has been incurred but not yet paid or received as of the end of an accounting period. It is a common concept in finance and accounting, particularly in situations where interest is earned or owed but hasn’t been settled in cash. Accrued interest is typically recorded as a liability or an asset on the balance sheet, depending on whether it represents interest payable or interest receivable.

Here’s how accrued interest is recognized and accounted for:

1. **Recognition of Accrued Interest:**
– When a company has earned interest on an investment or owes interest on a liability, and the payment date falls after the end of the accounting period, the interest is accrued.
– A journal entry is made to recognize the accrued interest, usually as an adjusting entry.

2. **Adjusting Journal Entry for Accrued Interest Receivable:**
– For interest that the company has earned but not yet received (receivable), the typical journal entry involves debiting an asset account (often called “Interest Receivable” or a similar name) on the balance sheet and crediting the corresponding interest income account on the income statement.

3. **Adjusting Journal Entry for Accrued Interest Payable:**
– For interest that the company owes but has not yet paid (payable), the entry involves debiting the interest expense account on the income statement and crediting a liability account (often called “Interest Payable” or a similar name) on the balance sheet.

4. **Payment or Receipt of Accrued Interest:**
– When the actual payment or receipt of cash occurs, a subsequent journal entry is made to reflect the transaction.

Accrued interest is common in various financial instruments such as bonds, loans, and other interest-bearing securities. It ensures that a company’s financial statements accurately represent its financial position and performance by recognizing interest income or expense when it is earned or incurred, even if the cash has not yet changed hands.

For example, if a company holds a bond that pays interest semiannually and its financial statements are prepared at the end of a month, it would need to accrue the interest that has been earned but not yet received since the next interest payment date is after the month-end.