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What is interest expense?

Author:
Harold Averkamp, CPA, MBA

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.

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About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has
worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

Learn More About Harold

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