Interest expense relates to the cost of borrowing money. It is the price that a lender charges a 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 and CAPEX, for it relates to the capital structure of a company, and it is usually tax-deductible.
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 The credit shifts to the accounts payable account when the lender sends an invoice for the expense. Finally, you debit interest payable and credit cash when the interest expense is paid. ==See also==