Your business loan payment leaves your bank account on the 15th of every month. Your month-end close happens on the 31st. So when you look at October's profit and loss statement, how many days of interest cost should it show — the 15 days you paid for, or the full 31 days your business actually used the bank's money? If you answered 15, your October profit is overstated and November will take a hit that isn't really November's. Interest accrues every single day, whether or not a payment is due, and accrual-basis accounting asks you to book it in the month it belongs to. That daily clock — and the adjusting entry that captures it — is accrued interest, and it touches borrowers, lenders, and bond investors alike.
What accrued interest actually is
Accrued interest is interest that has been earned or incurred but not yet paid or received. It exists because interest is a continuous cost of using money over time, while cash payments happen on a schedule — monthly, quarterly, semiannually. The gap between the last payment date and today is filled with interest that is economically real but hasn't touched cash yet.
Under accrual accounting, that gap can't be ignored. Two principles demand the entry:
- The matching principle says expenses belong in the period that benefited from them. October used the loan proceeds for 31 days, so October bears 31 days of interest expense.
- The revenue recognition principle says revenue belongs in the period it was earned. A lender who held your note through October earned October's interest in October, even if your check arrives November 15.
The booking mechanism is an adjusting journal entry made at period-end, and in most well-run closes it is a reversing entry: booked on the last day of the month and automatically flipped back on the first day of the next month, so the eventual cash payment can be recorded normally without double-counting. If your software supports reversing entries, make every routine interest accrual a reversing one — the single most common interest-accounting error is recording the later payment as a fresh full-month expense on top of an accrual that was never reversed.
One clarification worth making early: accrued interest is not the same as compound interest or interest capitalization. Accruing interest doesn't change what you owe the bank or what the borrower owes you — the loan agreement already defines that. It only changes when your books recognize the cost or revenue.
The two sides: Interest Payable vs. Interest Receivable
Every dollar of accrued interest appears on two sets of books at once, in mirror image. Which side you're on determines the accounts.
The borrower books Interest Payable (a liability)
If you owe the money, accrued interest is an expense you have incurred but haven't paid. The month-end entry debits Interest Expense and credits Interest Payable:
- Debit Interest Expense $412; Credit Interest Payable $412
Interest Payable sits on the balance sheet as a current liability — money you will hand over within the next payment cycle. When the payment actually goes out, you debit Interest Payable (clearing what you accrued) plus Interest Expense for any additional days since the accrual, and credit Cash.
Small businesses meet the borrower side constantly: term loans, lines of credit, equipment financing, commercial mortgages, and credit-card balances carried past the grace period. The line of credit deserves special attention because its balance moves daily — draws, repayments, and draws again — so the "principal" in your calculation is a moving target. Most borrowers in that situation accrue using the bank's own interest figure: your online banking portal usually shows interest accrued to date, and booking the bank's number beats recomputing a fluctuating balance by hand.
The lender books Interest Receivable (an asset)
If someone owes you the money, accrued interest is revenue you have earned but haven't collected. The entry debits Interest Receivable and credits Interest Income:
- Debit Interest Receivable $412; Credit Interest Income $412
Interest Receivable is a current asset — cash you have a contractual right to receive soon. When the payment arrives, you debit Cash, credit Interest Receivable for the accrued portion, and credit Interest Income only for the days since the last accrual.
When does a small business land on the lender side? More often than owners expect: seller financing when you sell equipment or a business on an installment note, a formal loan to another business you co-own, an employee advance documented as an interest-bearing note, and — the one that causes the most tax-season grief — shareholder loans. If your corporation lent money to you personally (or vice versa) with a stated interest rate, interest accrues on that note every month and belongs on the books, not just in a spreadsheet you reconcile at tax time. Below-market shareholder loans carry their own imputed-interest rules, which is a reason to document the rate in writing and accrue it monthly like any other note.
The same dollars, opposite signs
Notice that borrower and lender accrue the same amount for the same period on the same loan. If your business borrowed $100,000 at 6% and 16 days elapsed since the last payment, you book $263 of interest expense and the lender books $263 of interest income (using a 365-day year: $100,000 × 6% × 16/365). Neither side waits for cash. That symmetry is a useful self-check at close: if you can see both sides of a related-party note, the two accruals should agree to the penny.
How to calculate it: Principal × Rate × Time, plus a day-count convention
The basic formula is simple:
Accrued interest = Principal × Annual rate × (Days elapsed ÷ Days in year)
The subtlety hides in the fraction. "Days elapsed" and "days in year" sound unambiguous until you ask whether February counts as 28 days or 30, and whether the year has 360 or 365 days. The answers come from a day-count convention named in the loan agreement or set by market practice:
- 30/360 treats every month as 30 days and every year as 360 days. The standard for U.S. corporate and municipal bonds, and common in commercial mortgages. It makes every month's accrual identical, which simplifies both schedules and audits.
- Actual/360 counts real calendar days elapsed but divides by 360. Common in money-market instruments and many bank commercial loans. Because the denominator is smaller, it produces slightly more interest than actual/365 for the same period — about 1.4% more over a full year.
- Actual/365 (or actual/actual for non-leap precision) counts real days over a 365-day year. Common in consumer lending disclosures and U.K.-style agreements.
- Actual/actual counts real days over the real days in the coupon period and year. The standard for U.S. Treasury notes and bonds.
The convention genuinely changes the dollars. Take $100,000 at 6% for the 31 days of October:
- Under 30/360: $100,000 × 6% × 30/360 = $500.00
- Under actual/360: $100,000 × 6% × 31/360 = $516.67
- Under actual/365: $100,000 × 6% × 31/365 = $509.59
Same loan, same month, three answers up to $16.67 apart. For your own books, the rule is straightforward: use whatever convention the note specifies, because the lender computes the eventual payment that way and your accrual should reconcile to it. If the agreement is silent — common with informal related-party notes — pick one, document it in the note, and apply it consistently. Auditors and tax preparers care far more about consistency than about which convention you chose.
A practical shortcut for fixed-rate, fixed-payment loans: you don't need to hand-compute every month. Build or download an amortization schedule once, and read each month's interest portion off the schedule. Your month-end accrual is then just the pro-rated slice between the last payment date and the last day of the month. Reserve the manual formula for variable balances — lines of credit, credit cards — where no schedule exists.
The bond twist: buyers pay the seller's accrued coupon
Bonds add a wrinkle that surprises first-time buyers. Most bonds pay coupons semiannually — say, every January 15 and July 15. But bonds trade every business day. If you buy a bond on April 15, the seller held it for three months since the last coupon and economically earned three months of interest. The market's solution: the buyer pays the seller that accrued interest on top of the quoted price.
This is the clean price vs. dirty price distinction:
- The clean price is what you see quoted on a brokerage screen — the bond's market value alone, with no interest included. Quotes exclude interest so that a bond's price chart doesn't sawtooth upward every day and crash on each coupon date.
- The dirty price (also called the invoice price) is what you actually pay: clean price plus accrued interest from the last coupon date to the settlement date.
A concrete example: you buy $10,000 face value of a corporate bond with a 6% annual coupon paid semiannually ($300 every six months), settling exactly two months after the last coupon date. Under the 30/360 convention, two months is 60 days out of a 180-day half-year:
Accrued interest owed to the seller = $300 × 60/180 = $100
If the quoted clean price is $9,850, your invoice totals $9,950 — and that extra $100 isn't a fee or a premium. It's the seller's earned interest passing through your hands.
Why should a small-business owner care about bond-market plumbing? Three reasons. First, if your business holds bonds in a treasury or reserve account and you buy between coupon dates, your books must split the purchase: the clean price is your investment cost, and the accrued interest you paid is a receivable-like prepaid interest item — not part of the bond's cost basis. Lumping the full $9,950 into the investment account overstates your asset and understates your interest income when the first full coupon arrives. Second, the mirror image applies when you sell a holding between coupons: the accrued interest you receive from the buyer is interest income (or a reduction of your accrued receivable), not sale proceeds — don't let it inflate your reported gain on the sale. Third, at tax time in the U.S., the accrued interest you paid to a seller is an adjustment against the first coupon you receive: you report the full coupon as interest income and subtract what you paid the seller, so you're taxed only on what you actually earned. Keep the trade confirmation showing the split; reconstructing it in April from a brokerage statement is nobody's idea of fun.
Your month-end accrued-interest workflow
Whether you borrow, lend, or hold bonds, the monthly routine is the same four steps:
- List every interest-bearing balance. Term loans, credit lines, equipment notes, shareholder notes, notes receivable, bonds held. Pull each balance and rate as of the last day of the month — for fluctuating balances, grab the lender's accrued-to-date figure rather than recomputing.
- Compute interest through the last day of the month. Apply Principal × Rate × Time with the correct day-count convention, counting from (but not including) the last payment or accrual date through the month-end date.
- Book the adjusting entry — debit Interest Expense / credit Interest Payable as a borrower, or debit Interest Receivable / credit Interest Income as a lender. Flag each one as reversing if your software allows it.
- Verify on day one of the new month that reversals posted, so the next payment books cleanly against the payable or receivable instead of stacking a duplicate expense or income entry.
Four mistakes account for nearly every accrued-interest mess:
- Booking the whole payment as expense. A $2,000 loan payment is mostly principal with some interest; expensing the full $2,000 overstates costs and leaves the loan balance wrong forever.
- Accruing but never reversing. The accrual stays, the payment gets expensed in full, and interest is double-counted every single month. If your interest expense looks suspiciously high, check for unreversed accruals first.
- Forgetting daily accrual on big balances. On a $500,000 line at 8%, each unbooked day is about $111 of missing expense. Fifteen days across month-end is $1,644 of phantom profit.
- Ignoring related-party notes. The shareholder loan with no monthly payment still accrues interest every month. Booking it monthly keeps the balance honest and gives your tax preparer a clean number instead of a year-end reconstruction.
Tracking it in plain-text books
If you keep your books in Beancount, the accrual is two ordinary transactions — the month-end adjusting entry and the eventual payment clearing the payable. The Beancount documentation covers transaction syntax in full; here is the pattern for a business that owes 16 days of interest ($263.01) on a $100,000 term loan at 6% when October closes, then makes its $2,000 monthly payment on November 15:
2026-10-31 * "Accrue Oct 16-31 interest on term loan"
Expenses:Interest:Term-Loan 263.01 USD
Liabilities:Interest-Payable -263.01 USD
2026-11-15 * "Monthly term loan payment"
Liabilities:Interest-Payable 263.01 USD
Expenses:Interest:Term-Loan 246.58 USD
Liabilities:Term-Loan 1490.41 USD
Assets:Checking -2000.00 USDThe November payment splits three ways: the previously accrued $263.01 clears the payable, $246.58 covers the 15 days of November interest since the accrual, and $1,490.41 reduces principal. Nothing is double-counted because the payable carried October's share across the month boundary. The lender's books mirror this exactly — Assets:Interest-Receivable debited at accrual, Income:Interest credited — which is why related-party notes reconcile so cleanly when both sides accrue monthly.
The last useful step
Pull up your most recent month-end balance sheet and look for an Interest Payable or Interest Receivable line. If you carry any interest-bearing debt or notes and that line is missing or zero, your last close skipped the accrual — compute the days from your last payment date through month-end, book the adjusting entry as a reversing entry, and your next P&L will show what each month actually cost. Repeat it every close, and interest becomes the most predictable line on your books instead of the most surprising.
