Login details for this Free course will be emailed to you. Forgot Password? Article by Madhuri Thakur. What is Interest Expense? Formula Interest expense is usually calculated as the interest rate times the outstanding debt balance. Leave a Reply Cancel reply Your email address will not be published. Please select the batch.
Operations Books. Articles Topics Index Site Archive. About Contact Environmental Commitment. What is Interest Expense? Accounting for Interest Expense The lender usually bills the borrower for the amount of interest due.
List price definition Accounting for convertible It is very important to watch the interest amounts that the business is paying as changes in these rates can make a big difference to the profitability of the business.
Interest expense is defined as the interest amount that a company pays as interest on loans that have been taken from banks and financial institutions. This interest expense is something that is incurred accrued daily but is usually payable monthly, quarterly, semiannually, or annually.
Some companies have multiple loans that are taken for property, vehicles, and equipment. Companies with multiple loans or significantly high loan amounts are most vulnerable to increases in interest rates. It is a good business strategy to ensure that your business plan can accommodate sudden increases in interest rates.
It is generally found that interest expenses are largely dependent on the prevailing interest rates. These rates are usually higher when there is more inflation and are lower when there is less inflation in the economy. When a company has huge amounts of debt, the interest expense is very high. This can directly impact the profitability of the company. Interest expenses become a heavy burden especially when there is a slump in business. When there is a downturn in business, investors will give more importance to the interest expense and debt to equity ratio of the company.
Another number that would be of great interest to investors and business owners is the interest coverage ratio. This is the ratio of the operating income or EBIT — earnings before interest or taxes to the interest expense. This value tells you how well the company would be able to meet the interest expense with the operating income.
A higher interest coverage ratio of around 10 indicates that the company can meet its interest expenses relatively easily with its income. However, if the ratio is lower, around 3, it shows that the company will have a hard time meeting its interest expenses. It shows that there is potential trouble staying solvent. You can unsubscribe at any time by contacting us at help freshbooks.
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