What Is Accrued Interest? Meaning, Calculation, and Example

By Markets & Investing DeskUpdated Nov 10, 2026

Definition

Accrued interest is interest a lender has earned, or a borrower has incurred, since the last payment date but not yet paid. Accounting records it by period, and bond buyers pay it to sellers at settlement.

Key takeaways

Accrued interest equals principal times the annual rate times days accrued divided by the year basis.
Most U.S. corporate bonds use 30/360, while U.S. Treasury notes and bonds use actual/actual.
A bond's dirty price, the amount paid at settlement, equals the clean quoted price plus accrued interest.
Accrual changes when interest appears in financial statements, not the total interest paid over a loan's life.

Accrued interest is interest that has been earned by a lender, or incurred by a borrower, but not yet paid. It builds up from the last payment date to a chosen cutoff, such as the end of an accounting period or the settlement date of a bond trade. The money has not changed hands, but the obligation already exists. Accrual accounting requires it to be recorded, and bond markets require the buyer to compensate the seller for it.

What Is Accrued Interest?

Interest is a charge for the use of money over time, so it is earned continuously even when it is paid only monthly, semiannually or at maturity. Accrued interest captures the slice that has built up since the last payment. “Interest accrued but not paid” means the same thing.

The concept shows up in two settings:

Accounting. Under accrual accounting, a business recognizes interest in the period it relates to. A lender records accrued interest revenue; a borrower records accrued interest expense. Both sides do this even though the payment date falls in a later period.
Bond trading. When a bond changes hands between coupon dates, the seller has earned part of the next coupon. The buyer will receive that full coupon, so the buyer pays the seller the accrued portion at settlement.

The arithmetic is the same in both cases. What differs is the cutoff date and who records or pays the amount.

How Accrued Interest Works

Calculating Accrued Interest

Between payment dates, accrued interest is calculated as simple interest on the outstanding principal:

Accrued interest = Principal × Annual interest rate × (Days accrued ÷ Days in the year basis)

Each input has a specific meaning:

Principal: the balance on which interest is charged (for a bond, the face or par value, not the market price).
Annual interest rate: the stated or coupon rate.
Days accrued: days from the last payment date up to the cutoff (period end or settlement date), counted under the applicable convention.
Year basis: 365, 360 or the actual days in the period, depending on the convention.

The day-count convention is often the detail that produces a different answer from what a reader expects. Common conventions include:

Convention	How days are counted	Typical use
30/360	Every month treated as 30 days, year as 360	Most U.S. corporate and municipal bonds
Actual/actual	Actual days elapsed over actual days in the coupon period	U.S. Treasury notes and bonds
Actual/360	Actual days elapsed over a 360-day year	Many money market instruments and floating-rate loans
Actual/365	Actual days elapsed over a 365-day year	Some loans and non-U.S. markets

Loan agreements and bond indentures specify the convention. Using the wrong one changes the figure, sometimes by only cents per trade, but the error compounds across large positions or many accounting periods.

Interpreting Accrued Interest

Accrued interest is a timing item, not extra interest. The total interest a borrower pays over a loan’s life is the same whether it is accrued monthly or recognized only when paid. Accrual changes when that interest appears in the financial statements.

On the balance sheet, accrued interest that will be received or paid within a year is normally classified as a current asset (interest receivable) or a current liability (interest payable), for example on a certificate of deposit maturing within twelve months. On the income statement, the same amount appears as interest revenue or interest expense for the period.

Why Is Accrued Interest Important?

Accrual accounting rests on two principles that accrued interest puts into practice:

Revenue recognition principle: revenue is recorded when it is earned, not when payment arrives.
Matching principle: expenses are recorded in the same period as the revenue they help generate.

Consider a company that borrows to buy a delivery vehicle, with interest due on the first of each month. If it recorded the interest only on the payment date, that month’s profit would be overstated and next month’s understated. Accruing the interest at month end puts the cost of financing the vehicle in the same period as the revenue the vehicle produced. The bank does the mirror image, recording accrued interest income for the month.

Cash accounting works differently. It recognizes interest only when cash is paid or received, so there is no accrued interest entry. Many small businesses and individuals use cash-basis records, while companies reporting under GAAP or IFRS use accrual accounting.

Example of Accrued Interest

Loan Accrual at Month End (Hypothetical)

A company holds a $24,000 loan receivable at 7.3% annual interest, calculated on an actual/365 basis. The borrower pays interest on the 15th of each month, and the lender closes its books on the last day of each month.

Daily interest: $24,000 × 7.3% ÷ 365 = $4.80 per day

On June 30, interest has built up from June 16 through June 30, which is 15 days:

$4.80 × 15 = $72.00 accrued interest

The June 30 adjusting entries are:

Lender: debit Interest Receivable $72.00, credit Interest Revenue $72.00.
Borrower: debit Interest Expense $72.00, credit Interest Payable (accrued liabilities) $72.00.

On July 15 the borrower pays a full 30 days of interest (June 16 to July 15): $4.80 × 30 = $144.00.

Companies often book period-end accruals as reversing entries, which are reversed on the first day of the next period. When the $144 is recorded as July revenue, the reversal of the $72 leaves net July revenue of $72, matching the 15 days from July 1 to July 15. Without reversing entries, the bookkeeper splits the July 15 receipt: $72 clears the receivable and $72 goes to July revenue. Either way, June and July each keep the $72 they earned.

Bond Purchase Between Coupon Dates (Hypothetical)

An investor buys a corporate bond with a $1,000 face value and a 6% coupon paid semiannually on March 1 and September 1. Each coupon is $30. The trade settles on July 16, and the bond uses 30/360.

Step 1: Count the days. Under 30/360, days = 30 × (months between) + (day difference) = 30 × (7 − 3) + (16 − 1) = 120 + 15 = 135 days.

Step 2: Calculate accrued interest. $1,000 × 6% × 135 ÷ 360 = $22.50.

Step 3: Add it to the quoted price. If the bond is quoted at 98.5 (a clean price of $985), the buyer pays $985 + $22.50 = $1,007.50, plus any commission.

On September 1 the buyer receives the full $30 coupon. Net of the $22.50 paid at settlement, the buyer keeps $7.50, which is exactly 45 days of interest (July 16 to September 1 under 30/360). The 135 days and 45 days add up to the full 180-day coupon period, so each owner gets interest for the time they held the bond.

Accrued Interest in Bonds

Bond prices are generally quoted clean, meaning without accrued interest. The amount actually paid at settlement is the dirty price (also called the full or invoice price):

Dirty price = Clean price + Accrued interest

Quoting clean prices keeps the price from climbing through each coupon period and then dropping by the coupon amount once it is paid. That pattern would obscure real price changes caused by interest rates or credit quality. Yield calculations such as yield to maturity are based on the full price the investor actually pays.

A few cases change the usual pattern:

Zero-coupon bonds pay no periodic coupons, so there is no accrued coupon to settle at trade. The return comes from the discount to face value.
Bonds in default typically trade “flat,” without accrued interest, because the coupon is not expected to be paid. In some markets “flat price” is also used as a synonym for clean price, so the context matters.
Ex-coupon periods. In some markets, such as UK gilts, a bond goes ex-dividend several days before the coupon date. A buyer in that window will not receive the next coupon, so accrued interest is negative and is deducted from the price.

For U.S. taxpayers, accrued interest paid at purchase generally offsets part of the next coupon, which the buyer still receives in full. That accrued interest reduces the taxable interest reported, rather than being treated as new income.

Accrued interest vs. interest paid. Accrued interest is what has been earned or incurred so far. Interest paid is what has actually been settled in cash. In any period, interest expense on the income statement can differ from interest paid on the cash flow statement, and the gap is the change in accrued interest.

Accrued interest vs. compound interest. Accrual describes interest building up between payments, usually calculated as simple interest on principal. Compounding occurs when unpaid interest is added to principal so that future interest is charged on it too. A savings account may accrue interest daily and credit it monthly, and only the credited interest starts earning interest.

Accrued interest vs. capitalized interest. Some loans, such as certain student loans after a deferment, add unpaid accrued interest to the principal balance. Once capitalized, it stops being accrued interest and becomes principal.

Accrued interest on a loan payoff. When a loan is repaid between scheduled payments, the payoff amount is the principal plus the interest accrued since the last payment, so accrued interest is added, not subtracted.

Limitations of Accrued Interest

It is an estimate of a future cash flow. A lender records accrued interest revenue before collecting it, and if the borrower defaults the receivable may never be paid. Lenders typically place seriously delinquent loans on non-accrual status and stop accruing interest.
Convention differences. Two parties using different day counts will compute different amounts for the same period, so comparisons across instruments need the right basis.
It says nothing about value. A large accrued interest balance on a bond reflects only time since the last coupon. Whether the bond is cheap or expensive depends on the clean price and yield.
Variable rates complicate the math. For floating-rate debt, the rate can reset during the accrual period, so each segment of days uses the rate in effect for it.

FAQs

Is interest expense accrued monthly?

It depends on how often the company closes its books. Businesses that report monthly accrue interest at each month end; those that close quarterly accrue at quarter end. The calculation runs to whatever date the accounting period ends.

Can you have accrued interest without a loan?

Yes. Any arrangement that pays interest on a schedule creates accrued interest between payments, including bonds, certificates of deposit, savings accounts, notes receivable and interest-bearing customer balances. The holder of the instrument has earned interest that the issuer or bank has not yet paid or credited.

The Bottom Line

Bond investors, borrowers and businesses that use accrual accounting all deal with accrued interest. It is a timing item that keeps interest in the period it was earned and splits a coupon fairly between a bond's seller and buyer. Getting the figure right depends on the principal, the rate and the day-count convention set in the loan agreement or bond indenture.