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Interest expense relates to the
cost In production Production may be: Economics and business * Production (economics) * Production, the act of manufacturing goods * Production, in the outline of industrial organization, the act of making products (goods and services) * Production ...

cost
of borrowing money. It is the price that a lender charges a
borrower A debtor or debitor is a legal entity, 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 counter ...

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 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 Capital expenditure or capital expense (cap ...
and
CAPEX Capital expenditure or capital expense (capex or CAPEX) is the money an organization or corporate entity spends to buy, maintain, or improve its fixed assets, such as buildings, vehicles, equipment, or land. It is considered a capital expenditure ...
, for it relates to the
capital structure Capital structure in corporate finance Corporate finance is the area of finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and manag ...

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 A tax incentive is an aspect of a country ...

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 liabilitiesAccrued liabilities are Liability (financial accounting), 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 service ...
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 Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such as businesses and corporations. Accounting, which has been ca ...


References

ExpenseExpenditure is 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. For students or parent ...
Expense {{Accounting-stub