Definition of Credit Interest and Its Importance in Accounting

Credit interest is revenue earned from deposits, investments, and loans provided. In accounting, it is recorded as revenue in the income statement and increases profits, and is entered on the credit side of the revenue account. Its importance lies in improving profitability, providing an additional source of income, and evaluating the efficiency of liquidity management and short-term investments.

Types and Classifications of Credit Interest

Types of credit interest vary by source to include bank deposit interest, short-term investments, and loans provided to others, and by duration they are divided into short-term less than a year and long-term more than a year, while classified by interest rate into fixed and variable, and by timing into accrued and collected or accrued and uncollected. Accounting-wise, they are recorded as operating or non-operating revenues according to the company's primary business activity.

Where Credit Interest Appears in Financial Statements

Credit interest appears in financial statements in several places, where it is recorded as interest revenue in the income statement under operating or non-operating revenues according to the company's business nature, while accrued interest receivable appears in the balance sheet under current assets, and in the cash flow statement under operating cash flows when actually collected, in addition to its details, interest rates, and sources in the notes to the financial statements.

Accounting Treatment of Credit Interest and Journal Entries

Upon accrual: From Accrued Interest Receivable to Interest Revenue Upon collection: From Cash/Bank to Accrued Interest Receivable Classification: Revenue in income statement, accrued interest as current assets in balance sheet.

Practical Examples and Company Obligations Regarding Credit Interest

Practical examples: A company deposits 5 million SAR at 4% annual interest receives 200,000 SAR interest, or lends an employee 100,000 SAR at 6% interest earns 6,000 SAR annually. Company obligations: Record accrued interest at period-end even if not collected, disclose interest sources and rates in financial statements, calculate tax on interest revenue, and comply with accounting standards in timing, measurement, and presentation.