What is Interest Expense?

Interest expense represents the cost of borrowing money, which is the interest that accrues on loans or other forms of debt. When a company takes out a loan or issues bonds to finance its operations, it is obligated to pay interest on the amount borrowed. This interest constitutes an expense on the company's income statement, reflecting the cost associated with using someone else's capital.

In the context of financial accounting, interest expense is a crucial element of understanding a company's financing costs and overall profitability. It directly affects net income; therefore, tracking and reporting it accurately is essential for stakeholders analyzing the company's financial health. Interest expense will be recorded in the period in which it is incurred, regardless of when the payment is made, consistent with the accrual basis of accounting.

This focus on interest expense aids in understanding how well a company manages its debt and can inform decisions regarding future borrowing or investment opportunities.