Definition:

Interest Receivables refer to the interest income that has been earned but not yet received in cash. It is an asset on the balance sheet, representing the amount of interest that is due from borrowers or investments.

Examples

1. A bank has issued a loan to a customer, and the interest for the month has been accrued but not yet paid by the customer. This interest amount is recorded as interest receivable.
2. A company holds bonds that pay interest semi-annually. The interest that has accrued since the last payment date is recorded as interest receivable until the next payment is received.

Formula:

Interest Receivables = Principal Amount x Interest Rate x Time Period

How to use the metric:

Interest Receivables are used to assess the amount of interest income that is expected to be received in the future. It helps in understanding the cash flow projections and the financial health of a company, especially in financial institutions like banks.

Limitations:

Interest Receivables may not accurately reflect the actual cash flow if there is a risk of default by the borrower. Additionally, changes in interest rates or economic conditions can affect the collectability of these receivables.

Applies to:

This metric is most relevant in industries such as banking, finance, and investment where loans and interest-bearing securities are common.

Doesn't apply to:

Industries that do not typically engage in lending or investing activities, such as manufacturing or retail, may not find this metric as applicable since they do not regularly generate interest income.

Summary:

Interest Receivables represent the interest income that has been earned but not yet received. It is crucial for financial institutions to track this metric to manage cash flow and assess financial health. However, it may not be as relevant for industries that do not engage in lending or investing activities.