Interest Expense Formula
What is Compound Interest
Effective Rate of Interest Calculation
Nominal Interest Rate
When is Interest Rate Not as Important in Selecting a Loan?
Interest Expense Definition
Interest expense, defined as a non-operating expense on the income statement
, occurs anywhere money is borrowed. Interest expenses are considered part of a company’s financing activities. The interest expense represents the company’s cost of borrowing money. It is calculated as the interest rate
multiplied by the principal amount of the loan
or debt. Interest expense can be interest payments on loans, bonds, or other debt instruments.
Interest Expense Explanation
Interest expenses may be recorded on the balance sheet
as current liabilities
before they are expensed. If the interest expense is accrued prior to being paid, it can be recorded in a liabilities account called interest payable. This represents borrowing costs that the company has incurred but not yet paid.
Also, interest expenses can be recorded on the balance sheet as current assets
if they are prepaid. This means they are paid for before they are incurred. They will not be recognized as expenses until they are due according to the loan agreement, so prior to being expensed these payments are recorded as an asset on the balance sheet called prepaid interest.