PIK Interest - Payment-in-Kind Interest Income Accrual
Accruing PIK (Payment-in-Kind) interest on a portfolio company loan where interest is added to the principal balance rather than paid in cash, increasing the loan's face amount.
| Account Name | Type | Debit ($) | Credit ($) |
|---|---|---|---|
| Loan Investment - PIK Interest Capitalized (Portfolio Co. K) | Asset (+) | 90,000.00 | - |
| PIK Interest Income | Income (+) | - | 90,000.00 |
💡 Accountant's Note
PIK loans allow cash-constrained borrowers to accrue interest rather than pay it currently. The interest compounds by increasing the loan principal. For the fund, PIK interest is recognized as income even though no cash is received. This creates a non-cash income component that must be disclosed separately to LPs, as it inflates net income without corresponding cash flows available for distribution.
Practitioner & Systems Framework
💻 ERP Architecture
Track PIK principal separately from cash-pay principal in the loan ledger. PIK interest accruals increase the cost basis of the loan. When the loan is repaid or sold, the full PIK principal plus cash principal is received. Fair value marks must reflect the full PIK-accreted principal.
⚠️ Audit Flags
Auditors verify PIK elections (some loans have toggle provisions between cash and PIK) are documented per the credit agreement. Non-cash income must be clearly labeled in the financial statements and LP reports.
📄 Required Documentation
Credit agreement PIK provisions, PIK election notices, PIK interest calculation schedule, amortization table showing PIK accreted principal.
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