Accrued interest

Definition:

Accrued interest is the interest that has been earned on a financial instrument,  such as a savings account or loan, but has not yet been paid or received. It reflects the 

accumulation of interest over time prior to the scheduled payment date, which is crucial for  accurate financial reporting and management.

Example:

For example, if an individual maintains a ₹10,000 savings account with a 5%  annual interest rate, by the end of 6 months, the account would have accrued interest, even

though the full year's interest payment has not yet been disbursed. This accrued interest is an  important component of the overall financial position.

How to understand accrued interest:

Interest accrues continuously on deposits or loans over time. Payments are typically structured on specific schedules, such as monthly, quarterly, or annually. Accrued interest serves as a record of earnings or obligations before actual cash flow occurs, which is vital for financial transparency and accuracy.

Importance of Accrued Interest:

It allows individuals and organizations to track earned interest that has not yet been disbursed, aiding in cash flow management and financial forecasting. Accurate recording of accrued interest is essential for compliance with accounting standards and tax regulations.