How to Record Interest Income From Statements

To record interest income from a bank or savings statement, code each interest credit to an "Interest income" account under other income, dated the day the bank posted it. Keep it apart from sales so operating revenue stays clean. At year end, the account total should agree with box 1 of the bank's Form 1099-INT for that account.

Where bank interest income lines sit in the chart of accounts

Bank interest belongs in an "Interest income" account in the other income section of the chart of accounts, below operating revenue. It is real income, but it does not come from what the business sells, so mixing it into sales distorts margins and any figure built on revenue. One account per client is usually enough.

Some bookkeepers add a sub-account per bank account, such as "Interest income: savings 8812". That helps when a client holds several savings or money market accounts and the accountant wants to tie each to its own tax form. For a client with one savings account, a single account is simpler and loses nothing.

Two lines nearby are often confused with interest:

• Dividends from a money market fund held at a brokerage are dividends, not bank interest, and belong in their own account.
• "Interest paid" on a loan statement is the client's expense, not income. It sits in interest expense, as part of splitting the loan payment.

Monthly interest credits on savings and checking statements

Monthly interest credits are small, regular deposits labeled something like "INTEREST PAYMENT" or "INTEREST EARNED" near the end of each statement period. Because the wording is fixed by the bank and repeats every month, one rule per client codes them all to interest income without review.

A typical savings statement prints the interest credit as the last line of the period, often with the annual percentage yield earned in the summary box. Checking accounts that pay interest do the same, with amounts that can be a few cents. Write the rule on the bank's exact wording, and add the account's last four digits if the client has several accounts at the same bank.

Watch for two things when coding these lines:

• A credit that is much larger than usual. A savings account that earns 3.00 a month and suddenly shows 300.00 may have had a large deposit, or the line may be something else, such as a bonus for opening the account. Ask before coding.
• An unfamiliar description that just says "CREDIT". Small, unexplained credits are not always interest. If the wording does not name interest, treat it the way you would treat any unidentified deposit on a bank statement and ask.

Does interest income match the 1099-INT at year end?

Interest income in the books should match box 1 of Form 1099-INT for each account, as long as every month's statement was coded. A bank generally issues a 1099-INT when it paid at least 10 dollars of interest in the year. Smaller amounts are still income even when no form arrives.

The IRS instructions for Form 1099-INT set that 10 dollar threshold for reporting interest in box 1. In practice it means two things for a bookkeeper. A client with a very small balance may receive no form at all, and the books are then the only record. A client with several accounts at one bank should see the account number on each form, since the instructions require it when a recipient has more than one account, so tie each form to its own account.

An example tie-out

The table below compares twelve example monthly credits on one savings account to an example 1099-INT.

The twelve credits total 238.90. If the example 1099-INT shows 238.90 in box 1, the account ties. If the books instead show 217.28 against that form, the gap is 21.62, exactly the December credit. That points to a December statement that was never converted, or an interest line coded to some other account. A gap the size of one month's interest almost always means a missing or misdated month. Fix the gap in the books, then note the reason in the year-end workpapers.

Interest income that is not bank interest

Not every interest receipt comes from a bank. A client may earn interest on a loan they made to someone, on a customer's late invoice, or on a tax refund. These belong in interest income too, but they need a note on the source, because they may be reported differently or not on a 1099-INT at all.

• Loans the client made. If the owner lent money to another business and receives monthly payments, each payment holds principal and interest. Code the principal against the loan receivable and only the interest to income.
• Late fees charged as interest. If the client's invoices charge interest on overdue balances, keep it in a separate account from bank interest, so the year-end tie-out stays clean.
• Interest on a tax refund. A refund from a tax agency can include interest. Separate it from the refund itself.
• Money the owner put in. A deposit labeled "transfer" from the owner's personal savings is not interest even when it arrives at month end. Code it to owner contributions.

Is a tiny interest credit worth its own entry?

A tiny interest credit is still worth its own entry, because it is on the bank statement and the reconciliation must account for it. What you can skip is the manual work. One rule codes every monthly credit, and the only review needed is a glance at the account total each quarter against the expected rate.

The case where batching makes sense is a sweep or money market account that credits interest daily. Thirty one-cent lines a month are tedious to review one at a time. They should still be coded individually to keep the reconciliation exact, but you can review the account's monthly total instead of each line.

When conversion handles the rule, these lines never reach a person at all. In AutoBankConvert, a statement only counts as done once its opening balance plus the transactions equals the closing balance, so a missed interest credit stops the statement instead of slipping through. Lines the rules cannot place, such as an odd credit that may or may not be interest, wait in the bank statement review queue with a suggested category.