Why is interest expense a nonoperating expense?

Definition of Interest Expense as a Nonoperating Expense

Interest expense is the cost of borrowing money. For most companies the borrowing of money is not part of their main business activities. Most companies purchase or produce goods and sell them, or they provide services to clients, etc. The borrowing and lending of money is just an incidental or peripheral activity. Therefore, their interest expense is reported as a nonoperating expense on their income statements.

Example of Interest Expense as a Nonoperating Expense

Assume that prior to its holiday season, a retailer borrows $200,000 from its bank and promises to repay the bank in three months plus interest of $3,000.

On each of the retailer's monthly income statements, it will report $1,000 of interest expense in the "nonoperating" or "other" section, which appears after the amount of operating income is shown. As a result, the income statement allows for an easy comparison of the operations and profitability of companies regardless of their debt and interest expense.

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