21RQ - Horngren'S Financial And Managerial Accounting

Question

Why must companies record accrued interest revenue at the end of the accounting period? 

Step-by-Step Solution

Answer

Accrued income is reported to fulfill the requirements of the revenue recognition principle of accounting.

Step 1: Definition of Accrued Income

Accrued income can be defined as the income earned by the business entity over time, but the payment that is not received yet is known as accrued income. Such income is reported while preparing adjusting entries. 

Step 2: Reason for recording

The business entity earns interest over time rather than at the time of receipt of cash. Therefore, it is required to report the interest earned at the end of the period while preparing to adjust entries. Such a process is carried out to comply with the revenue recognition principle. 

Journal entry for recording the accrued interest revenue:

Date	Account and explanation	Debit ($)	Credit ($)
DD/MM/YYYY	Interest receivable	xx
	Interest revenue		xx