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The core purpose of a bank’s business model is to loan money, so its primary source of income is interest and its primary asset is cash. That said, banks rely heavily on non-interest contra asset account income when interest rates are low. When interest rates are high, sources of non-interest income can be lowered to entice customers to choose one bank over another.
Some income statements report interest income and interest expense separately as their own line items. Others combine them interest revenue and reported them under either “Interest Income – net” or “Interest Expense – net,” depending upon which is higher.
Interest Income Definition
A typical bank’s assets consist of all forms of personal and commercial loans, mortgages, and securities. The excess revenue that is generated from the interest earned on assets over the interest paid out on deposits is the net interest income. Net adjusting entries is a measure used by businesses to show how much money is being gained or lost on interest payments, and two factors are needed to calculate this.
These are the interest paid by assets, which is money businesses are gaining from customers and assets, and what businesses pay on liabilities, or money they are paying to customers and other entities. Businesses usually strive for a positive NIR, because this shows they are making more money on assets that they are paying out. While banks commonly use this calculation, because they tend to pay out more than other businesses and focus primarily on interest rates, other businesses also can use it. https://business-accounting.net/ can be defined as money earned through loaning money or money received from depositing or investing. Companies who charge interest on loans consider the interest revenue as a major source of income, which should be reported at the top of the income statement.
Net Interest Revenue N
Net refers to the fact that management has simply subtracted interest income from interest expense to come up with one figure. In other words, if a company paid $20 in interest on its debts and earned $5 in interest from its savings account, the income statement would interest revenue only show “Interest Expense – Net” of $15. Interest is the cost of borrowing money and is one form of income that banks collect. For financial institutions, such as banks, interest represents operating income, which is income from normal business operations.
