Interest expense is a non-operating expense shown on the income statement. It represents interest payable on any borrowings, loans or lines of credit.
Formula to calculate interest expense by simple interest method .
Example:
An individual took a loan of $ 5,000 from a bank. The interest rate was 5% and he was to payback in 3 years. Determine his interest expense.
Therefore, the interest expense is $750.
Formula to calculate interest expense by compounding interest method.
- P = Principal.
- t = No. of years.
- n = No. of compounding per year.
- r = Annualized rate of interest.
Example:
A man took a loan of $ 30,000 to be paid back at a 5% interest per annum compounded semi-annually, to be paid back after 5 years. Determine the interest expense.
Therefore, the interest expense is $ 8,402.54.
