Hello fellows,

I am new to this place. I came across the website while looking for an answer to the following question:

Why do companies deduct capitalized interest when presenting their interest expenses in the financial statements?

Here is an example. In the notes to financial statements Company A would disclose, under Interest Expense, the following:

Net interest expense consisted of the following:
Long-term debt $100,000
Short-term debt $10,000
Capitalized interest ($5,000)
Interest expense, gross $105,000
Interest income $1,000
Interest expense, net $104,000

Now, maybe this is a silly question, but I don't understand why they deduct capitalized interest. As far as I know, capitalized interest arises when the company builds something in-house and capitalizes the interest in the total cost of the asset, which is then expensed through depreciation. As I see it, the so capitalized interest does in no way affect the interest expense calculation - if doesn't flow through it.

So, if capitalized interest has not been counted towards interest expenses in the first place, why is it then used to reduce them? Or is it that interest is actually being paid on a loan and is thus calculated in total interest expenses, so the capitalized part has to be deducted?

Excuse me for sounding so confused. Any help will be appreciated.