Interest expense relates to the
cost
Cost is the value of money that has been used up to produce something or deliver a service, and hence is not available for use anymore. In business, the cost may be one of acquisition, in which case the amount of money expended to acquire it i ...
of borrowing money. It is the price that a lender charges a
borrower for the use of the lender's money. On the income statement, interest expense can represent the cost of borrowing money from banks, bond investors, and other sources. Interest expense is different from
operating expense and
CAPEX, for it relates to the
capital structure
In corporate finance, capital structure refers to the mix of various forms of external funds, known as capital, used to finance a business. It consists of shareholders' equity, debt (borrowed funds), and preferred stock, and is detailed in the ...
of a company, and it is usually
tax-deductible.
On the income statement, interest income and interest expense are reported separately, or sometimes together under either "interest income - net" (if there is a surplus in interest income) or "interest expense - net" (if there is a surplus in interest expense).
Calculation
The following shows the calculation of interest rate.
# Take the principal outstanding amount on loan during the period.
# Identify the annualized interest rate.
# Identify the time period, which the interest expense would be calculated.
# Use the following formula to calculate the interest expense.
Principal x Interest Rate x Time period = Interest expense
Once interest expense is calculated, it is usually recorded as
accrued liabilities by the borrower. The entry would be debited to interest expense and credit to accrued liability. The credit shifts to the accounts payable account when the lender sends an invoice for the expense. Finally, you debit to accounts payable and credit to cash when the interest expense is paid.
See also
*
Freight expense
References
{{Debt
Expense
Expense