What is interest capitalization, everyone needs to know

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

What is the capitalization of interest, most likely, not all residents of our country know. Nevertheless, this is an important concept, on which the final amount of income from a bank deposit depends. In essence, capitalization is analogous to compound interest, which, in turn, is the accrual of interest on the interest already accrued on the deposit.

For example, a legal entity or individual placed money on deposit with a credit institution in the amount of 100,000 rubles at 10% per annum. In the event that interest is accrued once at the end of the year, the depositor will receive 110,000 rubles back.

If they are accrued monthly, and they, in turn, accrue interest in the same amount (10%), then the amount in the account by the end of the year will be: 100,000 rubles. (initial amount) x (1 + 0, 1 (rate in shares) 12 (number of accrual periods) to the power of 12 (number of periods for whichmoney placed, 12 months)=110,471.31 rubles. That is, the income amounted to 471 rubles. more. That's what interest capitalization is. The difference, of course, is small, but the larger the amount, and the more often intermediate incomes are accrued, the greater the amount of the resulting benefit.

But a deposit with interest capitalization is not always unconditionally more profitable than the same operation with interest accrued at the end of the period. You should always pay attention to the size of the interest rate, the period of conclusion of the contract and the period of interest accrual. For example, an agreement with simple interest accrual at a rate of 12% per annum based on the results of the year will be more profitable than an agreement at a rate of 10% with compound interest accrued monthly throughout the year.

What is interest capitalization in terms of accounting? If an organization has placed any amount in a deposit with interest, then it is taken into account among financial investments. Interest under the deposit agreement is calculated depending on its terms. At the same time, from the point of view of accounting, it does not matter whether this interest has been received or not yet.

A deposit with a monthly capitalization of interest in the amount of 100,000 rubles at a rate of 10 percent per annum will be reflected in accounting as follows: Debit 58 accounts Credit 51 accounts for the principal amount (100 thousand rubles). After the end of the interest accrual period (monthly for 12 months), Debit 76 of account and Credit of account 91-1 reflect the fact of accrual in the amount of 100,000 x (1 + 0, 1 / 12) to the power of 12=10,471.31 rubles. Then reflectedreturn of funds from the deposit (initial 100 thousand rubles) on Debit 51 accounts and Credit 76 accounts. And, finally, interest already received (10,471.31 rubles) is taken into account through the following accounting entries: 51 accounts are debited, 76 accounts are credited.

What is interest capitalization from a tax point of view? Here, if the company keeps records of expenses and income in accordance with the accrual methodology, interest is reflected at the end of the relevant reporting period (year), even in cases where deposit agreements are concluded for a longer period, for example, three years. This rule is established by article 271 of the Tax Code in relation to loan agreements and other similar agreements.