If you are earning interest income that will be payable sometime after the end of the accounting period, you need to make an adjusting entry in your general journal. The entry is needed to reflect the amount of unpaid interest income you have earned as of the end of the accounting period.
As an example, say that your company has a one-year, $10,000 certificate of deposit that you purchased on May 1, 2004. It pays simple interest, at 6 percent, at the end of its term on April 30, 2005. As of December 31, 2004, you have earned $400, which is eight months of interest (10,000 x 6% x 8/12). You should make the following adjusting entry:
Interest receivable 400
Interest income 400
To record eight months’ accrued interest on 12/31/2004
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