Interest

Interest

The cost of borrowing money or the return earned on lending funds, typically calculated as a percentage of the principal amount over a specified time period.

For instance, a business with a $200,000 loan at 5% annual interest would incur $10,000 in interest expense per year, while a company with $100,000 in an investment account earning 3% would receive $3,000 in interest income annually.

Interest represents either an expense (when paying for borrowed funds) or revenue (when earning returns on investments). It may be simple (calculated only on principal) or compound (calculated on principal plus previously accumulated interest). The interest rate reflects factors including the time value of money, inflation expectations, default risk, and liquidity considerations. On financial statements, interest expense appears on the income statement and affects related assets or liabilities on the balance sheet.