## Accrued Interest: When Interest Due Dates and Year-End Don't Match

### The Problem

Consider 12% Debentures with interest payable on 30 June and 31 December (semi-annual), but the company's year-end is 31 March.

At 31 March, 3 months of interest (Jan–Mar) has accrued but is not yet due.

```

01-Jan ---------- 31-Mar ---------- 30-Jun

3 months 3 months

(accrued, (will accrue

YE entry) next year)

```

### Treatment

1. Interest up to due dates: Debit Bank (CIB), Credit Int column of Investment A/c → flows to P&L.

2. Interest accrued at year-end (from last due date to 31 Mar): Not recorded in Investment A/c. Instead:

```

Interest Receivable A/c Dr. [Accrued amount]

To Interest Income A/c [Same amount]

```

3. Opening of next year: This accrual is reversed / carried as opening balance.

### Why NOT in Investment A/c?

The Investment A/c Int column only reflects interest actually received or due. Accruals at year-end are an income recognition adjustment — they appear in a separate receivable account.

### Formula for Accrual

```

Accrued Interest = Face Value × Rate × (Months from last due date to Year-End) / 12

```

### Effect on Investment A/c Balance

The Cost column balance at year-end = original investment cost (unchanged by interest accruals). The NV column should balance — verify by adding all debit NV entries and subtracting all credit NV entries.

Worked example

### Example 1

Q16 – 12% Debentures (Interest due 30 Jun & 31 Dec; Year-End 31 Mar)

Purchase on 01.05.X1:

10,000 Debs × ₹102 = ₹10,20,000 (Ex-Int)
Interest paid on purchase (for 4 months: 01 Jan to 01 May):

= 10,000 × 100 × 12% × 4/12 = ₹40,000

Ledger Dr. entries on 01.05.X1:

NV Dr: 10,00,000
Int Dr: 40,000
Cost Dr: 10,20,000

30.06.X1 – Interest Received (6 months):

= 10,000 × 100 × 12% × 6/12 = ₹60,000

```

Bank A/c Dr. 60,000

To Investment (Int column) 60,000

```

Net Int position to P&L: 60,000 − 40,000 (paid) = ₹20,000 income

31.12.X1 – Interest Received (6 months):

= ₹60,000 (same as above)

31.03.X2 – Year-End Accrual (3 months: 01 Jan to 31 Mar):

= 10,000 × 100 × 12% × 3/12 = ₹30,000

```

Interest Receivable A/c Dr. 30,000

To Interest Income A/c 30,000

```

> This does NOT appear in the Investment A/c itself.

Investment A/c at Year-End:

NV balance: 10,00,000 (unchanged — no sales)
Cost balance: 10,20,000 (unchanged — no sales)
Int column: clears to nil after transferring net to P&L

Closing balance carried forward:

NV: 10,00,000 | Cost: 10,20,000 (shown in Balance Sheet as Investment)
Interest Receivable: ₹30,000 (shown as Current Asset)

⚠️ Common exam mistakes

Recording accrued year-end interest inside the Investment A/c Int column — it should go to a separate Interest Receivable account.
Forgetting the accrued interest receivable at year-end entirely, understating income.
Double-counting: including accrued interest in both the Investment A/c and separately as a receivable.
Computing the accrual period wrongly — always measure from the LAST interest due date to year-end, not from purchase date.
Reversing the opening balance of accrued interest incorrectly in the next period.

Reference:

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Accrued Interest at Year-End When Due Dates ≠ Year-End

Worked example

⚠️ Common exam mistakes