Definition of Interest Expense
Interest expense is the cost of borrowing money during a specified period of time. Interest expense is occurring daily, but the interest is likely to be paid monthly, quarterly, semiannually, or annually.
Example of Interest Expense
Let’s assume that a company uses the accrual basis of accounting. If the company borrows $100,000 on December 15 and agrees to pay interest on the 15th day of each month at the rate of 1% per month, 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%).
In this example, as of December 31 no interest has been 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 accrual adjusting entry that debits Interest Expense for $500, and credits Interest Payable for $500.
