What is accrued interest?
Accrued interest is interest that has been earned (on a receivable) or owed (on a payable) but not yet paid as of the reporting date. Under accrual basis accounting it is recognised in the period to which it relates, regardless of when cash settles. Accrued interest appears on the balance sheet as a receivable (asset) or payable (liability).
How it is calculated
For simple-interest instruments:
Accrued Interest = Principal × Annual Rate × Days Elapsed ÷ 365
A $1M convertible note at 6% per annum that has been outstanding for 90 days has $14,795 of accrued interest as of the reporting date.
Where founders meet accrued interest
- Convertible notes: often accrue interest that converts to equity alongside principal at the next priced round. Accrued interest dilutes founders along with the principal.
- Bank loans and revolvers: interest accrues daily but is paid monthly or quarterly; reported as accrued interest payable at month-end.
- Bonds: coupon payments accrue between payment dates; relevant for bond pricing.
- Deposits and short-term investments: interest accrues to the holder as an asset.
Accrued interest vs. related concepts
- Accrued vs. paid interest: paid is settled in cash; accrued is recognised on the books but not yet paid.
- Simple vs. compound: simple interest accrues on principal only; compound includes previously accrued interest. Convertible notes typically use simple interest.
- Interest payable vs. interest expense: payable is the balance-sheet liability; expense is the income-statement charge.
Do: track accrued interest on every convertible note and venture debt instrument monthly; surface it in cap-table models to show post-conversion dilution.
Don’t: ignore accrued interest in conversion math — over a 24-month note at 6%, accrued interest adds ~12% to the converting principal and meaningfully increases dilution.