How to Calculate Interest in Expense Accounting

Original post by Christopher Carter of Demand Media

A company that takes out a loan may have to pay interest depending on the terms of the loan agreement. The loan may be a short-term loan that must be repaid within one year, or it may be a long-term obligation the company has to pay in more than one year. Interest expense is the cost a company must pay to borrow money. It appears on a company’s income statement and decreases the business' revenue.

Step 1

Confirm the interest rate on the loan, and identify how long the company has to repay the loan. Verify the amount of the loan. This information allows a company to calculate interest expense. For example, assume a company took out a $50,000 loan that has an 8 percent interest rate. The loan must be repaid in two years.

Step 2

Multiply the interest rate by the amount of the loan. This produces a company’s interest expense for the entire year. For example, a company that took out a $50,000 loan with an 8 percent interest rate has a yearly interest expense of $4,000.

Step 3

Divide the yearly interest expense by 12 months. This calculation breaks down the yearly interest expense into monthly interest expense. For instance, a company with a yearly interest expense of $4,000 has a monthly interest expense of $333.

Resources

• Simple Studies: What is the Meaning of Accrued in Accounting?

References

• Middle City: Liabilities
• Accounting Study Guide: Accounting for Bonds Payable
• Principles of Accounting: Long-Term Obligations
• Forbes; Interest Expense; Scott Reeves

About the Author

Christopher Carter loves writing business, health and sports articles. He enjoys finding ways to communicate important information in a meaningful way to others. Carter earned his Bachelor of Science in accounting from Eastern Illinois University.