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Interest expense relates to thecost of borrowing money.[1] It is the price that a lender charges aborrower for the use of the lender's money. On theincome statement, interest expense can represent the cost of borrowing money from banks, bond investors, and other sources. Interest expense is different fromoperating expense andCAPEX, for it relates to thecapital structure of a company, and it is usuallytax-deductible.
On the income statement, interest income and interest expense are reported separately, or sometimes together under either "interest income - net" (if there is a surplus in interest income) or "interest expense - net" (if there is a surplus in interest expense).[2]
The following shows the calculation of interest rate.
Principal x Interest Rate x Time period = Interest expense[1]
Once interest expense is calculated, it is usually recorded asaccrued liabilities by the borrower. The entry would be debited to interest expense and credit to accrued liability called interest payable.[3] 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.