How to Calculate Interest Expense in Operating Income

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Operating income is the money a company makes from its normal business operations. For most businesses, income represents money left over after paying for the cost of goods sold and expenses necessary to run the business. Interest expense is not a common operating expense. Many income statements report earnings before interest and taxes (EBIT), which is the money left after deducting cost of goods sold and expenses from sales revenue. Interest expense goes after operating income so stakeholders know how much a company pays for borrowed money.

Review each loan a company has on its books. Retrieve the interest rate and original loan amount given by the lender.

Read the loan terms to determine how the lender will charge interest. For example, a business loan may require one percent interest each month from a company.

Multiply the interest rate by the current loan value outstanding. A $50,000 loan with a one percent monthly interest rate has a $500 monthly interest payment.

Record the interest payment into the general ledger. Debit interest expense and credit cash when paying the interest expense on the loan.

Prepare the income statement. List the revenues, cost of goods sold and operating expenses first on the statement. Deduct the latter two items from revenue to compute operating income, also called EBIT.

List the current interest expense amount underneath the previously calculated EBIT.

Subtract interest expense from EBIT to compute earnings before taxes. In some cases, companies display EBT as the final profit for an accounting period.

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References

  • "Intermediate Accounting"; David Spiceland, et al.; 2007
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