167. Accrued Interest Receivable And Payable

The farmer is often heard to remark that interest never sleeps. He has in mind the mortgage on his farm and realizes that whether crops are good or bad, the interest on the mortgage must be made when it is due. When the banker opens his doors in the morning, if at all imaginative, he might find awaiting him a tidy sum of interest on his loans and investments, accrued since he closed the door at night. If he be at all pessimistic and has been offering high rates of interest to secure deposits, he may easily see the huge form of Mr. Depositor waiting to draw interest. One day's interest has been earned on all loans and investments since the bank closed the previous day and one day's interest is owing all depositors whose accounts draw interest. The careful bank officer should know each day exactly how he stands on the matter, but very few do. They seem to think they are very conservative in not taking interest into profit and loss until the cash is actually received. Then too, the majority of the interest on investments may be, and probably is payable on the first days of January and July. The usual method is to credit profit and loss with the amount that happens to be in the interest earned account on the day the books are closed and charge profit and loss with the total of expenses including interest paid. Earnings and expenses ought to be distributed by months as far as possible.

A very simple method of accruing interest receivable day by day on loans will be explained in detail. Application of this principle may be made to bonds and mortgages, stocks and bonds, interest payable on accounts and certificates of deposit.

A columnarized sheet as shown in Figure 133 on page 297 will do for the daily record. Accounts should be set up in the general ledger as shown in Figure 134A and 134B on page 298. The accounts shown in Figures 135A and 135B on page 299 will already be on the ledger. We will carry the work over the end of the fiscal period to show how the books would be closed and will therefore begin our record on Monday June 27 and run to Wednesday July 6 closing the books on June 30.

The following transactions take place: June 27, loans made, $20,000 at 5 per cent and $10,000 at 6 per cent. These loans should be entered as per Figure 133 on page 297. At the end of the day, which is equal to the opening of the day following, "interest accrued" is charged and "interest accrued receivable" is credited with one day's interest on the loans made at the respective rates.

If the loans are not very active, the same sheet may

Interest Accrued Receivable On Loans

a-Reductions of Loan Account by Payments.

Figure 133. Accrued Interest Receivable.

Figures 134a and 134b General Ledger Accounts

Figures 135a and 135b General Ledger Accounts be used from day to day. If very active it will be better to open a new sheet each day with the balances outstanding at the various rates on the day previous.

On the 28th two new loans were made, $50,000 at 4 per cent and $25,000 at 5 per cent. These are entered in the proper columns on the daily sheet. At the close of the day "interest accrued" is charged and "interest accrued receivable" is credited with one day's interest on the total amount of loans held by the bank at the various rates as follows:

On the 29th three loans of $10,000 each are made at 4, 5 and 6 per cent respectively and entries made as per the figures. The accrued accounts receive the en tries on

On the 30th two loans are paid with interest, $20,000 at 5 per cent, the company receiving three days' interest amounting to $8.33, and $10,000 at 6 per cent, the company receiving three days' interest amounting to $5.00. These payments are entered on the daily sheet in red and deducted from the balance of the previous day. The $13.33 received as interest is charged to "cash" and credited to "interest accrued" as per Figures 135A and B on page 299, The accrued accounts receive the usual charges and credits for the interest on the balances in the loans at the different rates:

At this juncture the books are closed for the six months. "Interest accrued receivable" is closed into "profit and loss."

On July 1 two new loans are made, $75,000 at 4 per cent and $40,000 at 6 per cent. The usual entries are made in the accrued accounts:

The 2nd, being Saturday, but one loan is made, $15,000 at 5 per cent. Sunday and Monday being holidays it will be necessary to accrue for three days instead of one:

On the fifth all loans are paid with interest as follows:

The interest received, $154.43 is charged to "cash" and credited to "interest accrued" closing the latter.

The paid loans are entered in red on the daily sheet and deducted, leaving no loans on which to accrue interest at the close of the fifth day.

It is a little difficult to apply this system to deposits upon which interest is paid on average daily balances, but even this may be accomplished if these accounts are segregated from the non-interest bearing. It may be applied with no trouble at all to certificates of deposit and other special accounts.