Interest expense is the amount a company pays in interest on its loans when it borrows from sources like banks to buy property or equipment.
- What Is Interest Expense in Accounting?
- How Do You Find Interest Expense in Accounting?
- How Is Interest Expense Calculated?
1. What Is Interest Expense in Accounting?
Interest expense is the total amount a business accumulates (accrues) in interest on its loans. It’s the cost of borrowing funds, in short. Businesses take out loans to add inventory, buy property or equipment or pay bills.
Interest expense is important because if it’s too high it can significantly cut into a company’s profits. Increases in interest rates can hurt businesses, especially ones with multiple or larger loans.
Businesses with more assets are hit hardest by interest rate increases. For example, businesses that have taken out loans on vehicles, equipment or property will suffer most.
The Globe and Mail suggests talking to your lender about your debt repayment plan should interest rates rise. It may also be time to look at your business plan and make sure it can accommodate rate increases. Otherwise, staying profitable and growing your business could prove challenging.
2. How Do You Find Interest Expense in Accounting?
You can find interest expense on your income statement, a common accounting report that’s easily generated from your accounting program. Interest expense is usually at the bottom of an income statement, after operating expenses.
Sometimes interest expense is its own line item on an income statement. Other times it’s combined with interest income, or income a business makes from sources like its savings bank account.
If interest income and expense are combined, the line item can be called “Interest Income – net” or “Interest Expense – net.” The former is used if there’s more interest income than expense. The latter is used if there’s more interest expense than income.
For example, if a business pays $100 in interest on a loan and earns $10 in interest from a savings account, then there are more expenses than income and the line item could be “Interest Expense – Net” for $90.