Interest Expense
Also called: Interest Paid, Interest on Loan
Interest charged by banks or lenders on loans and overdrafts, on the Profit and Loss statement. Interest to individuals carries 15 percent TDS.
In detail
Interest Expense is the interest charged on term loans, overdrafts and other borrowings. Banks charge monthly or quarterly and usually debit the loan or current account directly, so the posting is a Journal Entry from the bank statement: debit this ledger, credit the bank account, or credit the loan account when interest is added to the balance. When the same payment covers principal and interest, the principal part is debited to the loan ledger, never here. Interest for a period not yet charged by the bank at Ashadh end is accrued against Accrued Expenses. Interest on money borrowed for an asset under construction can be capitalised into Capital Work in Progress instead.
Formula
Monthly interest = Outstanding principal x Annual rate / 12
Accounting entry
| Account | Debit | Credit |
|---|---|---|
| Interest Expense | Rs 20,000 | |
| Bank Account | Rs 20,000 |
How to record it in BRAccount
- 01Read the interest debit on the bank statement or the loan statement.
- 02Go to Invoicing > Journal Entry > New dated the charge.
- 03Debit Interest Expense; credit the bank account, or the loan ledger if interest was capitalised.
- 04If the instalment included principal, add a debit to Loans and Borrowings - Current for that part.
- 05Submit. The entry below posts.
- 06Match the row in Banking > Bank Reconciliation Tool and accrue any unbilled interest at Ashadh end.
When to use it
Post by Journal Entry or Payment Entry when the bank debits interest, usually quarterly. Capitalise interest during construction to Capital Work in Progress.
Example from the demo books
Dr Interest Expense Rs 20,000, Cr Bank Account Rs 20,000 for one month's interest at 12 percent on the Rs 20,00,000 term loan.