Definition
The financial accounting term interest expense is used to describe the interest payments that have come due on amounts borrowed by a company or an individual. Interest expense will appear as a line item on a company's income statement.
Calculation
A simple calculation for interest expense is as follows:
Interest Expense = Return on Debt x Debt Outstanding
Explanation
Also known as interest payable, interest expense is the result of a company issuing securities such as bonds, and other debt instruments, which provide the holder of the security with a predetermined payment schedule of interest income.
Interest expense is an important tax shelter, or shield, for both companies and individuals since it's often allowed as a tax deduction when computing federal income tax liability.
In addition to the repayment of a loan's principal, individuals will make payments that account for the interest charged on a loan or mortgage. That's why interest expense is sometimes referred to as the cost of borrowing.
Related Terms
The income statement is a financial accounting report that demonstrates how net income, or profit, is derived from revenues. The main categories appearing on an income statement include revenues, cost of goods sold, operating expenses, non-recurring items and net income.
Moneyzine EditorNovember 6th, 2024- The term interest rate is used to describe the amount charged to borrow money. It is the percentage of the principal paid by the borrower in each time period; typically stated as an annual rate of interest.Moneyzine EditorSeptember 25th, 2023
Generally, a tax shelter is a program that allows individuals or businesses to permanently reduce or defer the payment of income taxes. These programs are not right for everyone; even legitimate ones involve a level of risk that not every investor will be comfortable undertaking.Moneyzine EditorDecember 5th, 2023
