Interest Expense

I will start with what interest expense is not. It is not an actual amount of money paid to your creditors (that shows up on your cash flow statement). It is the cost of the money that was used during the time interval for which your income statement has been prepared.

In other words, your interest expense account on the income statement represents interest accrued during the period covered by the financial statements. And, therefore, represents interest payable (i.e. owed) on any type of borrowings – bonds, loans, convertible debt or lines of credit. It is basically calculated as the interest rate times the outstanding principal amount of the debt. 

Your interest expense is tax-deductible. Therefore, when planning your overall capital structure (the exact mix – or portfolio – of our long-term debt, specific short-term debt, common equity and preferred equity), you must take into consideration the tax consequences (among other things).