It is common knowledge that if a business wants to increase its profits, it should either increase its revenue or cut down its expenses. Interest expense is an expenditure that business owners would often neglect as it seems like a small amount that some of the business owners would not even calculate carefully. Others may leave the calculations for interests undone as it is too overwhelming to calculate the interests they need to pay for all the loans. However, if business owners wish to know the exact amount of money their business has made, they should hire an in-house accountant or an accounting firm in Johor Bahru and let the experts help them out.
Interest expense refers to the sum of money the company needs to pay for the interest of its loans. This expense will incur when a company borrows from financial institutions or banks for the procurement of equipment, vehicles or property. The calculations of interest expense are crucial as substantially high interests will reduce the profits of the company significantly. When there is an increase in the interest rates, it can be a huge blow to companies, particularly those with a larger amount of loans.
Where is the interest expense showed then? Interest expense will appear in the profit and loss statement, which is one of the financial statements that the accountants from an accounting firm in Johor Bahru would prepare for their clients if business owners choose to outsource their accounting tasks to them. Typically, interest expense appears at the bottom of the profit and loss statement. To calculate the amount of interest expense, one should multiply the rate of interest with average debt balance.
Some people may confuse between interest payable and interest expense. Although they look similar, there is a slight difference between them. Interest expense refers to the total sum of interest that the company owes for a loan. Interest payable, on the other hand, is the sum of interest that the company owes but has not paid. Both these figures will appear on the profit and loss statement of the company.
Another fact that business owners should know is interest expenses can be either an asset or a liability, depending on the timing the company pays for it. Similar to all other prepayments (Also see Understanding Down Payment), prepaid interests fall under the category of current assets. Contrarily, the interests that business owners have not paid is a type of current liability. These two items will appear in the company’s balance sheet.
One more thins to note is that interest expenses are not considered as operating expenses. Operating expenses are the expenditures that are related to the daily business operations of a company. Some of the examples are payroll, rental and so on. As paying for loans and the related interests is not directly related to the business operations of most companies, it falls under the category of non-operating expenses. Such categorisation enables business owners to analyse the financial position of the company more easily. Firstly, business owners will calculate the profit by deducting the operating expenses from revenue (Also see Journal Entries for Deferred Revenue). Then, they will minus non-operating expenses, and from here, business owners get to know the effect of debt on the profitability of their business.