See Also:
Interest ExpenseInterest Expense Formula
Interest expense calculations involve 4 parts: Principal, Rate, Time, and Compounding.
Simple interest expense formula (which excludes compounding):
Interest Expense = Principal X Rate X Time
Compound interest rate formula: Principal X (1+ (R / N))(N X T)
Where:
R = Interest rate
N = Number of times interest is compounded in a year
T = Time in years
Interest Expense Calculation
Principal = $50,000
Interest Rate = 7%
Time = 3 years
$50,000 X .07 X 3 = $10,500 in interest expense
Interest Expense Journal EntryWhen recording an interest expense journal entry, the interest expense account is debited and the cash account or the interest payable account is credited. This represents money coming out of the cash or interest payable account and going into the interest expense account.
If the interest payment has already been recorded as a liability, it may show up on the balance sheet as interest payable. If it has not already been recorded as a liability on the balance sheet, the amount used to pay for the interest expense will come out of the cash account or the prepaid interest account on the balance sheet. This journal entry is made when the interest expense is recognized. Depending on the circumstances, the journal entry may look like one of the following:
Debit Credit
Interest Expense $1,000
Cash $1,000
Interest Expense $1,000
Interest Payable $1,000
Interest Expense $1,000
Prepaid Interest $1,000
Interest Expense ExampleDwayne has started a company which rents party equipment. The equipment in which he rents are too expensive to buy straight up. Dwayne is considering financing some equipment, mainly the additional trucks he needs to move supplies, so that he could provide a high level of service. Dwayne wonders what his interest expenses would be. He looks on the web to find an "interest expense calculator". Dwayne calculates these results:
Principal: $50,000
Interest: 7%
Time: 3 years
Compounding: None
So:
$50,000 X .07 X 3 = $10,500 in interest expense