What it is:
Accrued interest refers to interest that builds up on a company's outstanding payables and receivables. This interest has been accounted for, but not yet transacted.
How it works (Example):
Companies maintain accounts receivable for funds owed to them. In addition, they maintain accounts payable representing funds they owe. The interest on outstanding money in these accounts is accounted for as accrued interest on a company's balance sheet (under assets in the case of receivables and under liabilities in the case of payables), though it represents money that has not yet been paid or received. For instance, though a given company may not have received $100 in interest on an outstanding $1,000 receivable, it will continue to record it as an asset on the balance sheet for the period in which it accrued.
Why it Matters:
Since accrued interest accumulates as a function of time, it is irrespective of a company's operational productivity during a given period.