Interest Revenue: Definition & Formula

Instructor: Tammy Galloway

Tammy teaches business courses at the post-secondary and secondary level and has a master's of business administration in finance.

In this lesson, we'll define two types of interest revenue. We'll also explore which financial statement of interest revenue is shown on the income statement, and where and how it's recorded.

What is Interest Revenue?

There are two ways a company can earn interest revenue: by loaning money or by depositing and investing money. The first way is when a bank wants something in return for loaning money; that's considered one type of interest revenue (i.e. interest on loans). The other way of earning interest revenue is when a company deposits or invests money with a bank - the bank pays the company interest on the deposit or the investment.

Either way interest revenue is earned, it's reported on the company's income statement. In this lesson, we'll also explore two ways of earning interest revenue, and explain how interest revenue is recorded on the income statement.

Interest Revenue on Loans

Do you know someone who has a car payment? Those payments are comprised of two parts: the principal and the interest. The principal represents the amount borrowed, while the interest is the cost the bank charges to loan the money. Basically, the bank wants something in return for loaning a person money (i.e. interest).

Financial institutions such as banks consider interest income a major part of their revenue stream. They make quite a bit on loaning money for homes, buildings, cars, trucks, industrial equipment and more. When a company is in the business of charging interest, such as a bank, they will record interest revenue at the top of the income statement. This lets you know that this is a major source of income.

Interest Revenue on Deposits & Investments

Not all companies receive interest revenue as a major source of income. For example, a large electronic store's major source of income is from selling computers, tablets and smartphones. However, it's possible for them to have interest revenue. Companies, just like individuals, have checking and savings accounts. They also invest their money in interest-earning products.

Banks pay customers interest for depositing or investing their money, which is also considered interest revenue. Since the electronic store is in the technology business and not in the business of charging interest, their interest revenue is considered a minor source of income. Minor interest revenue should be reported in a category called 'Other Revenue and Expenses' on the income statement.

Recording Interest Revenue

Major and minor interest revenue is reported on the income statement in two different areas. Interest revenue can also be recorded in two different ways: by the accrual basis or cash basis method.

The accrual basis method allows a company to report interest revenue when it's earned. For example, if a bank is supposed to earn $5,000 in interest income in January, it can report the $5,000 on its income statement before it actually receives the money.

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