## Interest

Interest is the income earned by lending money to someone within a specified period of time agreed between the lender and the borrower. It is computed by simply multiplying the principal amount by the interest rate and the period of loan.

We will use the below formula in order to compute for the interest expense:

{eq}i~=~(P*r*t)\\ Where:\\ P~=~principal\\ r~=~interest~rate\\ t~=~tenor~of~the~loan {/eq}

October 1 to December 31, when computed, is around 3 months or 90 days.

{eq}i~=~(30,000*0.12*3/12) {/eq}

The interest expense for 3 months is $900 To record for the accrual of interest on 12/31/12. Accounts Debit Credit Interest Receivable 900 Interest Income 900 To record for the collection of principal and interest on 6/30/13. Same as the first journal entry, we will compute for the interest earned from January 1 up to June 30, which is six months. {eq}i~=~(30,000*0.12*6/12) {/eq} The interest earned for 6 months is$1,800

Accounts Debit Credit
Cash (30,000 + 1,800 + 900) 32,700
Notes Receivable 30,000
Interest Receivable 900
Interest Income 1,800