Interest expense, defined as a non-operating expense on the income statement, occurs anywhere money is borrowed. Consider this part of a company’s financing activities. Interest expense represents the company’s cost of borrowing money. It is calculated as the interest rate multiplied by the principal amount of the loan or debt. This type of expense can be interest payments on loans, bonds, or other debt instruments.
Interest expenses may be recorded on the balance sheet as current liabilities before they are expensed. Record it in a liabilities account, if it was accrued prior to being paid. This liabilities account is also interest payable. This represents borrowing costs that the company has incurred but not yet paid.
Also, this expense can be recorded on the balance sheet as current assets if they are prepaid. This means that you have paid for them before they are due. Until they are due, you cannot recognize them as expenses according to the loan agreement. Record these payments as an asset on the balance sheet before they are expensed. Use the term prepaid interest interchangeably here.
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