Interest Income

Interest Income is generated when you finance purchases of expensive equipment (in B2B transactions) or expensive consumer items such as cars or aircraft (in B2C transactions) with long-term notes payable on which your client must pay interest. Typically, your customer pays in installments that combine both interest payments (that goes into your P&L) and repayment of principal (that goes into your cash flow statement).

Interest Income refers to so-called financing activities which are, strictly speaking, separate from your corporate operations. Because of that, your Interest Income is located on your P&L outside of your operating activities.

Nevertheless, in modern credit-driven world, business entities generate significant amount of financial value from their financing activities. Some even sell their products with miniscule profit margins and make almost all of their money from financing. Which they manage by setting up separate financing divisions (essentially, internal banks).

I will cover this corporate function in more detailed in Balance Sheet section devoted to Notes Payable. Because these notes generate Interest Income, not the other way around.