Accrued Interest In Real Estate

Definition of "Accrued Interest in Real Estate"

Bob Fields real estate agent

Written by

Bob Fieldselite badge icon

Realty One Group

The accrued interest definition can be explained through the interest collected by a set date on financial obligations that were not paid out. As interest can be of two types, so does accrued interest split into two kinds, accrued interest revenue for the party experiencing gain (the borrower) and accrued interest expense for the party experiencing cost (the lender).

Used in the accrual method of accounting, the accrued interest also follows the matching principles and the recognition principle. For each expense, there is a directly proportional revenue. When booking accrued interest in the income statement, they are included through adjusting journal entries at the end of the accounting period. The first day of the month of the following accounting period reverses these accrued interests: expenses become revenues and vice-versa.

How does Accrued Interest work?

Following the accrual accounting method, accrued interest accounts for expenses and revenues that are registered as an outgoing or incoming financial transaction, but cash was not recorded at the transaction time. The accrual method was developed as a way to account for any kind of transaction that was not reimbursed instantly. Accrued interest is a result of it and an evolution for the increasingly complex business transactions of today.

As mentioned above, accrued interests are recorded through adjusting journal entries at the end of every month in the income statement. Accrued interests can be revenues or expenses, and the amount of revenue or expense that was not yet paid is also recorded in the balance sheet. Expenses are liabilities, and revenues are assets. As accrued interests are expected to be paid over a year, they are also referred to as current liabilities and current assets.

The Matching Principle and the Revenue Recognition Principle

These principles govern the accrual method of accounting together with others under generally accepted accounting principles (GAAP). 

The matching principle, as stated above, demands a match for every expense and revenue, underlining the need to record in the same accounting period both related expenses and revenues. In other words, an expense sustained during July is recorded in the same period in which the revenue related to it is earned.

Example of the Matching Principle in Accrued Interest

If a rental owner pays 10% of the monthly rent earned on utilities, with a monthly rent of $1,000, using the matching principle of the accrual method, they will report the $100 utility expense during the same month as the month when they incurred the profit for that month.

The revenue recognition principle demands that the revenue be recorded when earned, even if it isn’t received. This means that business owners don’t have to wait to receive cash to record the revenue gained.

Example of the Revenue Recognition Principle in Accrued Interest

A rental owner that rents all the units in a property will recognize the fees from the rented units as earned even before the payments come from the renters.

image of a real estate dictionary page

Have a question or comment?

We're here to help.

*** Your email address will remain confidential.
 

 

Popular Real Estate Terms

A proposal to buy property at a specified price. The seller of the property has the options of accepting the offer, rejecting it, or making a counteroffer. For example, John signs a listing ...

Factor employed by real estate agents or appraisers to determine the change needed in operating income to obtain a desired rate of return. It is used to evaluate income-producing property. ...

Reduction of part of the balance of property by charging an expense or loss account. The reason for a write-down is that some economic event has occurred indicating that the asset's value ...

Descriptive of the architectural development of property in a certain area. For example, a housing subdivision may use very similar building architecture throughout the development. All the ...

Principle stating that the joint tenants must have equal rights to possession of the whole property. ...

Landlord's right to receive the value of the tenant's property to pay for unpaid rents or for damages to the leased premises. ...

The definition for the gross living area published by the Appraisal Institute’s Dictionary of Real Estate 4th Edition is: “The total area of finished, above-grade residential ...

Characteristic of a trust that prevents the invasion of its principal by the trustees while providing a lifetime income to its principal beneficiary with the rest going to the son's ...

Under a FHA-insured mortgage, both the property and the borrower must meet certain minimum standards. The borrower is charged an insurance fee of one-half percent on the unpaid balance and ...

Popular Real Estate Questions