Definition: Interest and financial transaction

Category: National accounts

The counterpart transaction of a financial transaction may be interest (D.41).  Interest is receivable by the creditors and payable by the debtors of certain kinds of financial claims classified in the categories currency and deposits (AF.2), securities other than shares (AF.3), loans (AF.4) and other accounts receivable/payable (AF.7).  In the system, interest is recorded on an accrual basis, that is to say interest is recorded as accruing continuously over time to the creditor on the amount of principal outstanding (see paragraph 4.50.).  The counterpart transaction of an entry in interest (D.41) is always a financial transaction creating an additional financial claim of the creditor against the debtor.  The effect of this financial transaction is that interest is reinvested.  The actual payment of interest is not recorded in interest (D.41), but it involves a transaction relating to the change in ownership of the means of payment.  The counterpart transaction is a financial transaction reducing the net financial claim of the creditor against the debtor.  When accrued interest is not paid when due, this gives rise to interest arrears.  As accrued interest is already recorded in the system, interest arrears do not change the total of financial assets or liabilities but possibly their classification (see ESA95 paragraph 5.131).