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March 2, 2009

What is interest expense?

Interest expense is the cost of debt that has occurred during a specified period of time.

To illustrate interest expense under the accrual method of accounting, let’s assume that a company borrows $100,000 on December 15 and agrees to pay the interest on the 15th of each month beginning on January 15. The loan states that the interest is 1% per month on the loan balance. The interest expense for the month of December will be approximately $500 ($100,000 x 1% x 1/2 month). The interest expense for the month of January will be $1,000 ($100,000 x 1%).

Since interest on debt is not paid daily, a company must record an adjusting entry to accrue interest expense and to report interest payable. Using our example above, at December 31 no interest was yet paid on the loan that began on December 15. However, the company did incur one-half month of interest expense. Therefore, the company needs to record an adjusting entry that debits Interest Expense $500, and credits Interest Payable for $500.

Learn more about Adjusting Entries.

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About the Author: Harold Averkamp (CPA) has worked as an accountant, consultant, and university accounting instructor for more than 25 years.

He is the author of the 2010 Master Accounting Download Package which has been praised for it's ability to simplify accounting in a way that anybody can understand.



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Comments

6 Responses to “What is interest expense?”

  1. Posts about Interest Rate as of March 2, 2009 | Fair Loan Rate! on March 2nd, 2009 5:11 pm

    [...] [...]

  2. gneelambike on April 9th, 2009 11:25 pm

    thanks for sending the mail

  3. rasel on December 12th, 2009 3:12 am

    i want to know about differernt types name of interest expense? pls submit me immediately

  4. george on February 4th, 2010 3:00 am

    I took from a bank with interest rate 10%/year the following sums on the following dates to invest in a company:
    USDollars 10000 Septamber 20, 2008
    USDollars 6522 February 02, 2009
    USDollars 8300 April 20, 2009
    USDollars 8152 June 16, 2009
    USDolars 2609 Julay, 21, 2009
    returned 13044 USDollars September 20, 2009
    returned 2174 USDollars December 22, 2009

    What do I have to pay interest tillnow, knowing that I pay interest every 3 months?

    Thanks and best regards.

  5. aryan on March 5th, 2010 3:32 am

    who made the topic of account?

  6. Joseph DvD on March 11th, 2010 4:44 am

    What is profitability?
    What is Non-perfoming loans and provisionfor credit losses ?

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