Accounting Tutorials
- Income Statement
- Income Statement | Top Examples | Template | Format | Analysis
- Income Statement Basics
- Income Statement Examples
- Income Statement Formats
- Income Statement Template
- Income Statement Formula
- Multi Step Income Statement
- Profit and Loss Statement Template
- Profit And Loss Statement Format
- Book Profit
- Contribution Margin Income Statement
- Sales Revenue
- Net Sales Formula
- Variable Costing Income Statement
- Pro Forma Income Statement
- Purpose of Income Statement
- Income from Operations Formula
- Cost of Goods Sold
- Cost of Goods Manufactured (COGM)
- COGS Formula
- Cost of Goods Sold Examples
- Cost of Sales Formula
- SG&A Expenses (Selling, General & Administrative)
- Interest Expense Formula
- List of Operating Expenses
- Non Operating Income
- Pretax Income (Earnings Before Taxes)
- Income Tax Expense
- Income Tax Accounting
- Earned Income
- Average Total Cost Formula
- Gross Profit
- Gross Profit Formula
- Direct Costs
- Indirect Costs
- Prime Cost
- Duty vs Tariff
- EBITDA
- EBITDA Calculation
- Adjusted EBITDA
- EBIT (Earnings Before Interest and Tax)
- EBIT Calculation
- Net Operating Income
- Operating Income
- Turnover vs Profit
- Operating Profit vs Net Profit
- Net Income Formula
- EBITDA Formula
- Operating Expense (OPEX)
- Operating Expense Examples
- Interest Expense
- LTM EBITDA
- NOPAT
- Non Recurring Items
- EBIT vs EBITDA | Top Differences | Examples | Calculation
- Depreciation – Formula | Types | Most Comprehensive Guide
- Depreciation Expense Formula
- Depreciation Rate
- Straight Line Depreciation Method Formula
- Accumulated Depreciation Formula
- MACRS Depreciation
- Depreciation Tax Shield
- Accelerated Depreciation
- Written Down Value Method
- Depletion Expense
- EBITDA vs Operating Income
- Straight Line Depreciation Method
- Sum of Year Digits Method of Depreciation
- Declining Balance Method of Depreciation
- Land Depreciation
- Double Declining Balance Method
- Amortization of Intangible Assets
- Depreciation vs Amortization
- Unrealized Gains (Losses)
- Non Cash Expense
- Warranty Expense
- Other Expenses
- Accrued Income
- Share based compensation
- Restructuring Cost
- Extraordinary Items
- Interest Income
- Lease Payment
- Financing Costs
- Effective Tax Rate Formula
- Progressive Tax
- Taxable Income Formula
- Completed Contract Method
- Tax Shield Formula
- Double Taxation
- Marginal Tax Rate
- Tax Haven
- Net Loss
- Pro-Forma Earnings
- Margin vs Profit
- Net Operating Loss (NOL)
- Tax Loss Carry Forward
- Tax Loss Harvesting
- Tax Shield
- Sundry Expenses
- Trade Discount
- Trade Discount vs Cash Discount
- Percentage of Completion Method
- Interest vs Dividend | Top 9 Differences (with Infographics)
- EBITDA vs Net Income
- EBIT vs Net Income
- EBIT vs Operating Income
- Above the Line vs Below the Line
- Operating Income vs Net Income
- Cost vs Expense
- Expense vs Expenditure
- Accounting Profit vs Economic Profit
- Income Tax vs Payroll Tax
- Tax credits vs Tax deductions
- Tax Evasion vs Tax Avoidance
- Sales Tax
- Excise Tax
- Indirect Tax
- Direct Tax vs Indirect Tax
- Tax Lien
- Value Added Tax (VAT)
- Ad Valorem Tax
- Estimated Tax
- Proportional Tax
- Tax-Exempt
- Marginal Tax Rate Formula
- Regressive Tax
- Regressive Tax Examples
- Gross Income vs Net Income
- Profit vs Revenue
- Revenue vs Earnings
- Revenue vs Net Income
- Revenue vs Income
- Profit vs Income
- Revenue vs Sales
- Revenue vs Turnover
- Capitalization vs Expensing
- Income Statement vs Balance Sheet | Top 5 Differences You Must Know!
- Statement of Comprehensive Income | Items | Colgate Example
- Variance Analysis
- Other Comprehensive Income
- Partial Income Statement
- Income Summary Account
- FOB Destination
- Explicit Cost
- Implicit Cost
- Direct cost vs Indirect Cost
- Fixed Cost
- Fixed cost vs Variable cost
- Price vs Cost
- Hard Cost vs Soft Cost
- Overhead Costs
- Nopat vs Net Income
- Marginal Costing vs Absorption Costing
- Marginal Cost Formula
- Margin vs Markup
- Markup Formula
- Contribution Margin vs Gross Margin
- Accounting Basics (80+)
- Bookkeeping (52+)
- Balance Sheet (30+)
- Assets (109+)
- Liabilities (68+)
- Shareholders Equity (91+)
- Cash Flow Statement (17+)
- Accounting Careers (26+)
- Accounting Books (8+)
- Budgeting in Finance (31+)
Related Courses
What is Interest Expense?
Interest expense represents an amount of interest payable on any borrowings which includes loans, bonds or other lines of credit. Every firm needs money for financing its operations from a bank and pay a small fee based on the amount borrowed until is repaid. These are costs incurred by the entity for borrowed funds shown on the income statement.
Interest expense in the Income statement is usually calculated as the interest rate times the outstanding debt balance. These expenses on the income statement highlight interest accrued during the period covered by the financial statements and not the interest amount paid over the time period. While such expenses are tax-deductible for firms, with respect to an individual, the purpose and jurisdiction of the loan are applicable.
Formula
Below is the formula to calculate interest expense.
How is Interest Expense Recorded in the Income Statement?
It is reported after the Operating income or EBIT as shown in the income statement below.
source: Apple SEC filings
Example
Let us look at the below instance for a clear understanding of such an expense under the accrual method:
Assume a company borrows $125,000 on January 15 and agrees to pay interest amount on 15th of every month from February 20. The loan indicates interest is 2% per month on the loan balance. The interest expense for month of January shall be [125,000 * 2%* 0.5 month] = $1,250.
4.9 (1,067 ratings)
Interest for month of February = $125,000 *2% * 1 = $2,500
- It should be noted that interest on the debt is not paid on a daily basis and a firm must record an adjusting entry to accrue this expense and to report interest payable.
- Extending the above example, the loan was commenced from January 15, so for that month, only interest for remaining days (0.5 months) would be considered.
Interest Expense Journal Entries
Let us look at the below examples of journal entries of interest expense:
Monthly Journal Entry –
(This signifies cash amount paid out against interest recording)
Postpaid Journal Entry –
(Interest payment is recorded as a liability and amount is to be paid)
Prepaid Journal Entry –
(Cash paid in advance for interest payable in the future)
How is Interest Expense Recorded in Balance Sheet?
- Interest accrued but not paid would be recorded under Current Liabilities of the Balance Sheet (as interest payable)
- Interest paid in advance will be recorded within the section of Current Assets as a Prepaid item.
Where is Interest Expense Recorded in Cash Flow Statements?
- As the net profit or loss reported by the firm’s cash flow statement includes this expenses the business has paid during a given time period, the amount paid appears as a separate line item on the company’s cash flow statement and the appropriate this expense will appear under the income statement.
- The interest amount paid on loans (short term and long term debt) is recorded under Operating activities in the cash flow. However, the principal amounts borrowed and that repaid are separately included under financing activities. Since loan amounts are borrowed money and not an income from the sale of goods or services, they are a part of the cash flow statement but not the income statement.
Interest and Tax Shield
Interest reduces the overall taxes in the income statement and thus can be used as a way to reduce tax liabilities (also called as tax shield).
For example, a firm with no Debt and EBT [Earnings Before Tax] of $2 million (tax rate @30%), the tax payable will be $600,000.
If the same firm assumes a debt and has an interest of say $500,000, the new Earnings before Profit would be $1.5 million [$2million – $500,000]. This will make their taxes payable $500,000 [$1.5mm*30%].
Thus, there is a tax shield of $600,000 – $500,000 = $100,000.
Net Interest Expense
source: Colgate SEC filings
Net interest expense is the Total Interest net of any interest income received on Investments. On a financial statement, the income can be listed separately from expenses or provide a net interest number which is either positive or negative.
Recommended Articles
This has been a guide to what is Interest Expense in the Income Statement. Here we discuss interest expense formula, journal entries along with its practical examples. You may learn more about accounting from the following articles –
- Purpose of Cash Flow Statements
- Examples of Current Liabilities Formula (with Excel Template)
- Software AG Cash Flow Statement Example
- Formula of Interest Expense
- Financing Activities
- Explain Income Summary Account
- Equity vs Fixed Income – Compare
- What is Capitalized Interest?
- Calculate Imputed Interest
