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.
However in the case of formal agreements where a loan carries fixed repayment terms at fixed rates of interest such interest has to be disclosed in the balance sheet.
Figurewizard automatically calculates and applies interest suspense items to all of its forecasts. Follow the link at the end of this article to "Assets and Liabilities Forecast" to view how these are displayed.
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 or any other interest rates that may vary over time, are not required to be disclosed in your balance sheet.
When applicable Figurewizard calculates and applies any interest suspense accounts to your balance sheet forecasts automatically.