Accounting for Non-accrual Loans By: Rocky Levkulich, CPA Date: 9/24/09 When a loan is placed on non-accrual status, previously accrued and unpaid interest income is reversed.  Additionally, if there is doubt about collectability, interest payments collected after non-accrual status must be applied to reduce principal.  If it is deemed that the loan no longer needs to be on non-accrual status, previously foregone interest should only be recognized when collected.  Additionally, interest payments applied to principal during non-accrual status cannot be reversed immediately into interest income.  The bank now has a new basis in the loan and the discount is accreted into income based on the effective yield-to-maturity on the loan.