{"id":"concept:interest-expense","kind":"concept","label":"Interest expense","synonyms":["interest paid","finance charge","interest cost"],"definition":"Interest expense is the cost of borrowing money, and it is only the portion of a loan payment that is not repaying the amount borrowed.","summary":"Every loan payment is two things at once: principal, which reduces what you owe, and interest, which is the price of the loan. Only the interest is an expense. Recording the whole payment as an expense overstates your costs and leaves the loan looking like it never goes down.","explanation":["Borrowing money is not itself a cost. If you take out a $20,000 loan you are $20,000 richer in cash and $20,000 poorer in obligation, and nothing has been spent. The cost arrives later, a little at a time, as interest — the price the lender charges for letting you use their money.","This is why a loan payment never posts as a single line. Suppose you pay $1,200 and your lender tells you $950 of it was principal and $250 was interest. Three lines record what really happened: the loan balance falls by $950, interest expense rises by $250, and your bank account falls by the full $1,200. The entry balances, and both facts survive — you owe less, and borrowing cost you something this month.","Get the split wrong in either direction and a specific thing breaks. Book the whole $1,200 as an expense and your profit is understated by $950 while the loan sits on the balance sheet forever, never shrinking. Book the whole $1,200 against the loan and your profit is overstated, because $250 of genuine cost never reached the profit and loss at all.","Your lender does the arithmetic for you. Loan statements and amortization schedules break every payment into principal and interest, and the ratio shifts over the life of the loan — early payments are mostly interest, later ones mostly principal. Read the number rather than estimating it, because the estimate is wrong every month by a different amount.","Credit-card interest works the same way and is easy to miss, because it does not arrive as a separate transaction. The purchases on the card are already recorded as their own expenses; the finance charge on top is the cost of not paying the balance off, and it deserves its own line so you can see it."],"example":"A $1,200 mortgage payment where the statement shows $250 interest, $700 principal, and $250 escrow is three separate things, not one. Interest expense takes $250, the loan balance takes $700, and the escrow is neither — it is money held to pay property tax and insurance later.","commonMistakes":["Recording the entire loan payment as an expense, which overstates costs and leaves the loan balance frozen","Recording the entire payment against the loan, which hides a real cost and overstates profit","Treating a bank fee or a card annual fee as interest — those are service charges, not the price of borrowing","Netting interest paid against interest earned; they are an expense and an income and belong on opposite sides"],"category":"transactions","questions":[{"question":"How do I find the interest portion of my payment?","answer":"Your loan statement or amortization schedule shows it, and almost every lender breaks each payment into principal and interest. Do not estimate it — the split changes every month as the balance falls."},{"question":"Is interest I pay deductible?","answer":"Interest on money genuinely borrowed for a business is usually deductible, but there are limits and exceptions that depend on your circumstances. Record it separately so the figure exists when it is needed, and ask your accountant what applies to you."},{"question":"What about interest my savings account earns?","answer":"That is income rather than expense. It belongs in an income account such as Other Income, and it should never be netted against interest you paid."}],"url":"/glossary/interest-expense","relatedTo":[{"id":"concept:liability","relationship":"related","weight":0.9,"api":"/api/knowledge/concept%3Aliability"},{"id":"concept:expense-account","relationship":"related","weight":0.9,"api":"/api/knowledge/concept%3Aexpense-account"},{"id":"concept:journal-entry","relationship":"related","weight":0.9,"api":"/api/knowledge/concept%3Ajournal-entry"},{"id":"concept:split-transaction","relationship":"related","weight":0.9,"api":"/api/knowledge/concept%3Asplit-transaction"},{"id":"concept:profit-and-loss","relationship":"related","weight":0.9,"api":"/api/knowledge/concept%3Aprofit-and-loss"},{"id":"concept:balance-sheet","relationship":"related","weight":0.9,"api":"/api/knowledge/concept%3Abalance-sheet"},{"id":"account:6750-interest-expense","relationship":"references","weight":0.7,"api":"/api/knowledge/account%3A6750-interest-expense"},{"id":"account:6700-interest-paid","relationship":"references","weight":0.7,"api":"/api/knowledge/account%3A6700-interest-paid"},{"id":"tool:categorize_transactions","relationship":"references","weight":0.7,"api":"/api/knowledge/tool%3Acategorize_transactions"}],"referencedBy":[{"id":"concept:split-transaction","label":"Split Transaction","url":"/glossary/split-transaction"},{"id":"concept:liability","label":"Liability","url":"/glossary/liability"},{"id":"concept:expense-account","label":"Expense Account","url":"/glossary/expense-account"}],"license":"https://creativecommons.org/licenses/by/4.0/","attribution":"BalanceMCP — https://balancemcp.com"}