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# Interest Expense Formula

Modified on 2011/07/22 13:27 by swathen Categorized as Uncategorized
Interest Expense

# Interest 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 Entry

When 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 Example

Dwayne 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