What is interest capitalization , most likely, not all residents of our country know. Nevertheless, this is an important concept on which the final amount of income from a deposit in a bank depends. In essence, capitalization is an analogue of compound interest, which, in turn, represents the accrual of interest on already accrued interest on a deposit.
For example, a legal entity or individual placed money in a contribution to 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 charged monthly, and they, in turn, are charged interest in the same amount (10%), then the amount that appeared on the account by the end of the year will be: 100,000 rubles. (initial amount) x (1 + 0.1 (rate in shares) \ 12 (the number of accrual periods) to the power of 12 (the number of periods for which money is placed, 12 months) = 110,471.31 rubles, i.e., the income amounted to 471 rubles more, which is interest capitalization, of course, the difference is small, but the larger the amount, and the more often intermediate incomes are accrued, the greater the amount of the resulting profit.
But a deposit with capitalization of interest 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 calculation. For example, a contract with simple interest at a rate of 12% per annum for the year will be more profitable than a contract at a rate of 10% with compound interest charged monthly throughout the year.
What is interest capitalization from an accounting perspective? If the organization has placed any amount on a contribution with interest, then it is taken into account among financial investments. Interest on a deposit agreement is accrued depending on its conditions. Moreover, from the point of view of accounting, it does not matter if these percentages are received or not.
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), the debit of 76 accounts and the Credit of account 91-1 reflects the fact of accrual in the amount of 100,000 x (1 + 0.1 \ 12) to the extent of 12 = 10,471.31 rubles. Then reflected the return of funds from the deposit (the original 100 thousand rubles.) Debit 51 accounts and Credit 76 accounts. And, finally, interest is already taken into account (10 471, 31 rubles) through the following accounting entries: 51 accounts are debited , 76 accounts are credited.
What is capitalization of interest from a tax point of view? Here, if the company keeps records of expenses and income in accordance with the accrual basis, interest is recorded at the end of the relevant reporting period (year), even in cases when 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.