A company might receive interest from making a loan, purchasing an interest-bearing investment, or from having an interest-bearing bank account. In each situation, the company must (1) record interest revenue when interest is earned and (2) increase the cash account when interest is received.
If the interest is earned and cash is received at the same time, then the company can simply debit the cash account and credit interest revenue (or interest income).
If the interest is earned BEFORE the cash is received, then the company must debit interest receivable (because the cash hasn’t been received yet) and credit interest revenue. Later, when the cash is collected, the company can debit the cash account and credit interest receivable.
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