Interest and the Balance Sheet
The rule concerning interest charges is that they are generally only applied to the accounts as and when they arise.
In the case of formal agreements where a loan carries fixed repayment terms at fixed rates of interest, these are required to be disclosed in the balance sheet.
The Interest Suspense Account
Take for example an asset finance loan of £3,000 taken out at the beginning of the financial year with interest fixed at 7% p.a. (£210 p.a.) repayable over 48 months.
An interest suspense account is first created for the 36 months interest payable of £630 that remains at the end of the financial year, which is then cancelled out in the balance sheet by its current and long term liabilities as follows:
|Interest Suspense Acc.||£630||Current Asset|
|Short term Interest payable - not more than 12 months||£210||Current Liability|
|Long Term Interest payable - more than 12 months||£420||Long Term Liability|
The reason for this self - cancelling approach is to disclose current and long term fixed interest liabilities in the balance sheet, while maintaining the rule that interest is only charged as and when it arises.
Exceptions to Interest Suspense
Disclosing interest in the balance sheet in this way only applies to liabilities for fixed term loans where the values of interest payable are also fixed, making them known quantities.
Estimates for future interest payable on the likes of bank overdrafts or factoring / invoicing debt, with values that will fluctuate and interest rates that may vary over time, are not required to be disclosed in the balance sheet.
Figurewizard calculates and applies the interest suspense account to your balance sheet forecasts automatically.
No input is required from you other than the budgeted cost of assets; their percentage to be financed; for how many months and the agreed rate of interest. The same goes for fixed term loans to the business, for example from a bank or director.