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.
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.
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.
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.
- 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.