Where does Interest Expense end up on BS? Does it even go on there? If you have an interest expense on the IS, is this reflected on the BS as a liability?
It could end up a seperate line item if you have accrued interest expense @ 12/31 its a payable on your BS. Some auditors might want you to roll it into the debt principal but its not required.
sorry, but i’m not sure if i understood your explanation. was wondering if you take out a loan, does the periodic IE have to be added to your liabilities?
Yes, the periodic expense would be a payable on your books.
For interest that you have paid (interest expense), it goes into NI and ending in the RE portion. For accumulated interest expense (the interest you haven’t paid but accumulated during the accounting period), it’s the interest payable and goes to current liability section.
It is important to make the distinction between current portion of long term debt and interest expense when determining the amount to put on the balance sheet. Example: Jan 1 - Take out a $1000, 5 year loan at 5%. ($231 payments due at end of each year) Balance sheet at Jan 1 would contain the following: Current Liabilities Current portion LT Debt __________181 Non-current Liabilities Long Term Debt________________ 819 The remainder of the $231 payment ($50) is interest. Note that interest expense is not included anywhere on the balance sheet. If the company fails to pay interest in a given period, then there would be an interest payable amount in the current liability section (what blackdog and grey said)
Correction: On a conventional debt arrangement, interest will not be recorded as principal. Interest is recorded as it is incurred. Therfore, the total amount of interest payments and neither added to short term nor long term debt. Under a fully amortizing loan (Consider Tstone’s $1000, 5-yr note, 5% note). Also be mindful that most bank loans issued to corporations are not fully amortizing, but with the proportional principal balance due at loan termination (e.g., 20 percent due in each of 5 years).