Interest Expense

When a company borrows, it must pay interest to its lenders. Interest expense records that cost in the income statement for the period in which it accrues, whether or not it has been paid yet.

For example, a company with a 2 million loan at 6% a year incurs about 120,000 of interest expense annually.

Interest expense usually appears below operating income on the income statement, because it reflects how the business is financed rather than how well it operates. Subtracting it from operating income, along with any other non-operating items, gives profit before tax.

In many tax systems, interest expense is deductible, which reduces taxable profit, although some countries limit how much interest can be deducted.

Analysts watch interest expense closely. Rising interest expense can signal growing debt or higher interest rates, and it reduces the profit left for shareholders. Comparing operating income with interest expense, through the interest coverage ratio, shows how comfortably a company can meet its interest payments.