When a company loans money or makes an investment, it does so with the expectation of making money from it, often in the form of interest. Whether the interest is considered "interest receivable" or "interest revenue" for the company hinges upon when the company actually receives the profit.
Interest receivable is the profit a company receives in interest payments made on investments. This profit ultimately will be recorded on the company's balance sheet. Example investments include deposit accounts, loans or bonds. When a borrower takes out a loan, the borrower is charged a certain interest rate on that loan. The payment of that interest is considered income to the company. Interest payments received on either fixed or variable rate securities is also considered a form of interest receivable since it also represents a source of income for the company.
Interest receivable is expected profit. Once an interest receivable is actually received, it is then considered interest revenue. Interest revenue represents the recorded interest payments received by a company as opposed to interest payments the company expects to receive at some point in the future. Interest revenue is recorded on the company's balance sheet. A balance sheet is a condensed financial statement that shows a company's financial standing on a specific date. The balance sheet lists the assets a company owns, how it paid for those assets, the amount of the company's liabilities, meaning how much it owes, and how much the company will have left over once those liabilities have been satisfied.
The three main financial documents of a company are its cash flow statement, income statement and balance sheet. An audited balance sheet is required by law. In addition, along with a cash flow statement and income statement, a balance sheet is often requested by investors and lenders in order to ascertain the overall financial stability and profitability of a company. The inclusion of interest revenue on their balance sheets is one way companies demonstrate their profitability.
A balance sheet is based on the accounting equation, assets = liabilities + owners' equity. The more assets a company has, the more attractive it is to investors and lenders. Although the inclusion of interest revenue on the balance sheet helps the company's bottom line, until interest receivable is received by the company, it is not interest revenue and therefore may not be included on the balance sheet. This means that on a specific date, a company might have a larger asset base and a higher degree of profitability than it may demonstrate on its balance sheet at that time.