Interest expense relates to the
cost
In production, research, retail, and accounting, a 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 whic ...
of borrowing money. It is the price that a lender charges a
borrower
A debtor or debitor is a legal entity (legal person) that owes a debt to another entity. The entity may be an individual, a firm, a government, a company or other legal person. The counterparty is called a creditor. When the counterpart of this ...
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
An operating expense, operating expenditure, operational expense, operational expenditure or opex is an ongoing cost for running a product, business, or system . Its counterpart, a capital expenditure (capex), is the cost of developing or provi ...
and
CAPEX, for it relates to the
capital structure of a company, and it is usually
tax-deductible
Tax deduction is a reduction of income that is able to be taxed and is commonly a result of expenses, particularly those incurred to produce additional income. Tax deductions are a form of tax incentives, along with exemptions and tax credits. T ...
.
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 Accrued liabilities are liabilities that reflect expenses that have not yet been paid or logged under accounts payable during an accounting period; in other words, a company's obligation to pay for goods and services that have been provided for wh ...
by the borrower. The entry would be debit 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
In accounting, the concept of a freight expense or freight spend account can be generalized as a payment for sending out a product to a customer. It falls under the umbrella category of expenses and is treated like other expense accounts in rela ...
References
Expense
An expense is an item requiring an outflow of money, or any form of Wealth, fortune in general, to another person or group as payment for an item, service, or other category of costs. For a leasehold estate, tenant, renting, rent is an expense. Fo ...
Expense
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