The Difference Between Cash Interest and Interest Expense

Cash Interest

Cash interest is the amount of interest paid in cash, so it’s a great way to save money. When the Direct Method is used for the operating section of the cash flow statement, cash interest paid is the amount that is recorded.

This figure is different from interest expense, which is the total amount of interest incurred during the period, including both cash and non-cash transactions. Cash interest paid is usually lower than the interest expense, which makes it a great way to save money and reduce costs.

Interest Expense

Interest payments can add up quickly, putting a strain on a business’ finances. Interest expense is the cost incurred by an entity for borrowed funds. It is a non-operating expense shown on the income statement and represents interest payable on any borrowings like bonds, loans, convertible debt, or lines of credit.

The amount of interest expense is calculated as the interest rate times the outstanding principal amount of the debt. It represents interest accrued during the period covered by the financial statements, not the amount of interest paid.

Companies can deduct interest expense for tax purposes, but individuals’ ability to deduct it depends on jurisdiction and loan purpose.

Difference Between Cash Interest and Interest Expense

The key distinction between cash interest and interest expense is the timing of the payment. Cash interest is the amount of interest expense that has already been paid to creditors. Interest expense, on the other hand, is the total amount of interest owed.

For example, if a company has a total interest expense of $200,000 for a year, and by December 31st, $150,000 of the interest expense had been paid, that means the cash interest for that year is $150,000, and the interest expense is still $50,000 due to be paid.

In accrual-based accounting, the interest expense must be recorded in the financial statement regardless of when the cash is paid. This means that the total interest expense figure is always the same, but the cash interest figure will fluctuate as payments are made.

Conclusion

You now know the difference between cash interest and interest expense.

Cash interest is money that’s received either on a loan or an investment.

Interest expense is the money that’s paid on a loan or debt.

Both cash interest and interest expense are important components of financial management.

The key difference between cash interest and interest expense is who receives the cash.

Cash interest is received by the investor or lender, while interest expense is paid by the borrower or debtor.

Knowing the difference between these two terms can help you make more informed financial decisions.