Accrued interest refers to interest expense or interest income accrued on a financial obligation but has yet to be paid. The debtor and creditor calculate the accrued interest amount using the stated interest rate, principal amount owed, and the number of days during the accrual period.
The accrued interest formula is generally the following:
Accrued Interest = Loan Principal X Interest Rate X (Accrual Period / 360 days).
Accrued Interest Example
Company ABC Inc., a Delaware corporation, borrowed $1,000,000 from a third-party lender on January 31, 2023. The secured promissory note is an interest-only note, payable annually, with a 6% interest rate. The loan term is ten years, and the promissory note requires a balloon payment of principal to be paid at the end of the 10-year term.
Company ABC Inc. is preparing its financial statements for the 2023 fiscal year. The company will owe an interest payment of $60,000 on January 31, 2024; however, it needs to calculate the amount of accrued interest as of December 31, 2023. The company calculates a 334 day accrual period from January 31, 2023 to December 31, 2023.
Accrued Interest = $1,000,000 x .06 x (334 days / 360 days)
Accrued Interest = $1,000,000 x .06 x .9278
Accrued Interest = $55,668
The company’s accrued interest for the 2023 fiscal year is $55,668. It will accrue the remaining interest in January 2024 and ultimately make the $60,000 interest payment on January 31, 2024.
The company’s income statement for 2023 should reflect interest expense of $55,668, and the current liabilities section of the balance sheet shows accrued interest payable for $55,668.