Interest Expense Formula

# Interest Expense Formula

Interest expense calculations involve 4 parts: Principal, Rate, Time, and Compounding.
Use the following formula to calculate simple interest expense (which excludes compounding):

Interest Expense = Principal X Rate X Time

To calculate the compound interest rate, use the following formula:

Principal X (1+ (R / N))(N X T)

Where:
R = Interest rate
N = Number of times interest is compounded in a year
T = Time in years

Interest Expense Calculation Principal = \$50,000 Interest Rate = 7% Time = 3 years

\$50,000 X .07 X 3 = \$10,500 in interest expense

## Interest Expense Journal Entry

When recording an interest expense journal entry, the interest expense account is debited and the cash account or the interest payable account is credited. This represents money coming out of the cash or interest payable account and going into the interest expense account.
If you have already recorded the interest payment as a liability, then it may show up on the balance sheet as interest payable. If it has not already been recorded as a liability on the balance sheet, then the amount used to pay for the interest expense will come out of the cash account or the prepaid interest account on the balance sheet. Make this journal entry when the interest expense is recognized.

### Journal Entry Example

Depending on the circumstances, the journal entry may look like one of the following:

```                                 Debit                Credit
Interest Expense                  \$1,000
Cash                                          \$1,000
Interest Expense                  \$1,000
Interest Payable                              \$1,000
Interest Expense                  \$1,000
Prepaid Interest                              \$1,000```

Interest Expense Example
Dwayne has started a company which rents party equipment. The equipment in which he rents are too expensive to buy straight up. Dwayne is considering financing some equipment, mainly the additional trucks he needs to move supplies, so that he could provide a high level of service. Dwayne wonders what his interest expenses would be. He looks on the web to find an “interest expense calculator”. Dwayne calculates these results:
Principal: \$50,000 Interest: 7% Time: 3 years Compounding: None
So:
\$50,000 X .07 X 3 = \$10,500 in interest expense
As you calculate the interest expense in your company, learn how to be a highly effective CFO or financial leader. Download the free 7 Habits of Highly Effective CFOs whitepaper.

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