The financial accounting term interest expense is used to describe the interest payments that have come due on amounts borrowed by a company or an individual. Interest expense will appear as a line item on a company’s income statement.
A simple calculation for interest expense is as follows:
Interest Expense = Return on Debt x Debt Outstanding
Also known as interest payable, interest expense is the result of a company issuing securities such as bonds, and other debt instruments, which provide the holder of the security with a predetermined payment schedule of interest income.
Interest expense is an important tax shelter, or shield, for both companies and individuals since it’s often allowed as a tax deduction when computing federal income tax liability.
In addition to the repayment of a loan’s principal, individuals will make payments that account for the interest charged on a loan or mortgage. That’s why interest expense is sometimes referred to as the cost of borrowing.